Market Versus Real World

An increasingly bullish outlook is on a collision course with Fed policy goals that still demand tighter financial conditions. The complications risk leading to longer hawkishness. 

As in many other things in life, markets can pick up momentum and become unstoppable. That seems to be happening now.  The market, after all, can to an extent create its own reality. 

This week is set up to create a first confrontation between the market’s and the real world’s versions of reality.

What’s eye-catching is the way that markets for a number of risk assets are displaying just the behavior that technical analysts or chartists look for when they hope to see a “breakout” to a new level.

Central bankers want to slow down the economy, and hope to use tighter financial conditions to achieve it. 

This goes far beyond target overnight rates; ideally, we would see equity valuations fall and longer bond yields rise, while the liquidity available in the system dries up. 

The action of the last few weeks undoes such hopes. According to Bloomberg’s broad US model, financial conditions are now looser than they were on the eve of the Ukraine invasion. Remarkably, they are even more relaxed than when the fed funds rate was still effectively zero last March,

Nobody should ignore the market’s rally. But that includes the Fed. And the market rally may give its governors little choice than to be more aggressive than they currently are.

John Authers 30 januari 2023

Will the Fed Overdo It?

The US Federal Reserve is clearly determined to bring down inflation. But no one really knows how high it will have to raise its policy interest rate – and how long it will have to keep it there – to achieve its objective. Many are thus wondering whether the Fed will bring on a recession.

RAGHURAM G. RAJAN Project Syndicare 24 January 2023

The Federal Reserve and investors appear to be locked in an epic game of “chicken.” 

What Fed Chair Jerome Powell says Wednesday could determine the winner.

Here’s the conflict. Fed policy makers have steadily insisted that the fed-funds rate, now at 4.25% to 4.5%, must rise above 5% and, importantly, stay there as the central bank attempts to bring inflation back to its 2% target. 

Fed-funds futures, however, show money-market traders aren’t fully convinced the rate will top 5%. Perhaps more galling to Fed officials, traders expect the central bank to deliver cuts by year-end.

MarketWatch 29 January 2023

Varje period av räntehöjning i USA har slutat med någon slags finansiell kris.

Förmöghetsförvaltaren ASR Home – ASR Wealth Advisers har tagit fram ett olycksbådande diagram som visar hur den amerikanska räntan utvecklats sedan 1970.

DPS 27 januari 2023


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