The joy of a high-speed jump misses the point

One view is that the real shock of the jumbo rate hike came a few days ago, when well-informed suggestions of a jumbo rate hike spread through the market like wildfire. So, Wall Street’s rebound was less of a rally and more of the market correcting slightly on the fact after being sold too hard on the rumor mill.

The other view is that Powell gave the market what it wanted and declared war on inflation.

Rates jump “before”

Not only did it rise on a scale he ruled out just weeks ago, but Powell also openly admitted the Fed had early rate jumps. That means raising rates more now in the hope of rising less later – and actually promising to keep rising until inflation starts to come down.

“We want to see progress. Inflation cannot come down until it stabilizes,” Powell said. “If we don’t see progress…it could make us react. Soon we will see progress. »

Overall, Powell’s tone was broadly in line with major investors’ wishes like hedge fund legend Bill Ackmanwho want the Fed to raise rates faster so markets can take their medicine now and then get relief when they start to fall.

But like politicians around the world crying out for central banks to do something about the inflation their constituents face, investors need to be careful what they wish for.

If the markets suddenly want to believe in Powell’s credibility, then it’s surely important to take note of arguably the most important thing he said during his Wednesday night press conference: “There’s no sign of a broader downturn in the economy that I can see.”

Now, that was pretty curious in itself, given that Powell’s press conference came just hours after new US retail sales data came in well below expectations, suggesting inflation is very biting. Data showing soaring credit card debt and plummeting mortgage applications in the United States have also worried market watchers in recent days.

The impact on earnings is yet to come

But take Powell at his word. Obviously, his intention was to argue that the US economy is resilient enough to deal with higher rates. But that implicitly implies admitting that the Fed’s rate hikes and monetary tightening so far haven’t really had much of an impact on the US economy so far.

For investors, this is a very important point. The economic downturn the Fed knows it must now induce has not actually begun. For equity investors, that means the hit to earnings that would typically accompany such a downturn hasn’t started either.

Investors have seen prices fall, but so far earnings forecasts in the United States and Australia have not been revised down. Powell says it’s coming.

“The Federal Reserve will raise interest rates until policymakers break inflation, but the risk is they also break the economy,” says Ryan Sweet, head of monetary policy research at Moody’s Analytics. “Growth is slowing and the effect of tighter financial market conditions and the removal of monetary policy has yet to hit the economy.”

The idea of ​​the Fed quickly carrying out its up cycle and then orchestrating a classic Fed put to save investors by then cutting rates is certainly appealing. But what remains unclear is how high rates will need to be to keep inflation under control and how much demand the Fed will need to remove from the economy.

Powell still believes a soft landing is possible, and it’s notable that Wednesday night’s rate hike was accompanied by heroically optimistic projections that unemployment would barely fall.

But as countless observers have said in recent weeks – from former RBA Governor Ian Macfarlane to Wall Street legend Stanley Druckenmiller – it would be unusual for inflation to fall unless interest rates hit not higher than inflation at any given time.

The Fed’s projections suggest a terminal rate of around 3.75% right now. Is it really enough?

The best advice for investors Chanticleer has seen after the big Fed move came from Mike Loewengart, head of portfolio management at Morgan Stanley in the United States.

“Keep in mind that as we move through a changing monetary policy landscape, we will likely continue to see volatility as the market digests the new normal. Sticking to your investment strategy during waves of volatility is a solid course of action – that is, don’t panic.

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