Markets Are Fighting the Fed
Investors aren’t supposed to fight the Fed. It’s one of the most constant aphorisms driven into the mind of any investor that they should never do it. But...
Jerome Powell and his colleagues at the Federal Reserve told us that they were more hawkish than people realized, and that the projected course of interest rates should be adjusted upwards.
The market responded by adjusting its estimates of rates slightly downwards.
Stocks were down by the close, but not much, and were even in positive territory for a while during the doom-laden press conference. The dollar weakened, and longer-term bond yields fell a little.
The 10-year rate is a little below 3.5%.
So, what did the market see and hear from Powell and his colleagues to persuade them that he didn’t really mean what he was saying? There are various theories
Powell affirmed that the Fed would keep on with “QT” asset sales, which would further mop up liquidity. The Fed has told us very clearly that it’s more hawkish than we thought, and it’s inherently very dangerous to ignore it.
John Authers Bloomberg 15 december 2022
Fed s Inflation Outlook at Odds With Markets
Fed sees economic growth of just 0.5% next year, down sharply from September’s 1.2% projection and consistent with a recession.
It sees unemployment climbing to 4.6% from 3.7% now, higher than projected in September. Such a combination would normally entail lower inflation.
Yet the Fed actually raised its inflation forecast for the end of next year, to 3.1%. Excluding food and energy, it increased its “core” inflation forecast to 3.5% from 3.1%.
This is just the opposite of what investors have concluded from the recent run of good news on inflation.
“The labor market continues to be out of balance, with demand substantially exceeding the supply of available workers,” Mr. Powell said.
Greg Ip WSJ 15 December 2022
The Markets Don’t Believe the Fed
Investors think the central bank will start cutting sharply next year. That’s a problem.
The Federal Reserve has a credibility problem. It wants markets to believe that it will keep raising rates, that they will peak above 5% and that it will then hold them there until at least the end of next year.
But investors flatly refuse to accept the third.
The failure to convince Wall Street is undermining the Fed’s tight-money policy. The 30-year mortgage rate has pulled back from a peak above 7.1% to below 6.5% in less than two months, and financial conditions overall are as loose as they were at the start of June
The run-up in stocks, bond prices and credit recently rests on the triple assumption that inflation will recede, that the Fed is wrong about needing to keep rates high to control inflation and that it will realize in time that it doesn’t need to force a recession.
If the market is mistaken on any of the three, the rally should reverse.
James Mackintosh WSJ 15 December 2022
https://www.wsj.com/articles/the-markets-dont-believe-the-fed-11671112067
WSJ torsdag:
U.S. stocks were falling on Thursday morning, a day after the Federal Reserve raised rates and increased its estimates of how high rates may have to go.
The Dow industrials were down almost 700 points soon after the open, and the other major indexes were also down 2% or more.
Central banks in the U.K., the eurozone and Switzerland also raised rates, highlighting the risks to a late fall rally that has taken the Dow, for instance, up 16% from its recent low.
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