Investors are clearly betting that the Fed isn’t going to do what it says

 If you wanted to be harsh about the markets’ reaction to Powell’s statement, you’d say they laughed in his face.

The interesting question is whether this matters — and the answer to that depends on another question: Why don’t they believe the Fed?

There are (at least) three possibilities.

This is a straightforward disagreement about where the economy is headed. “I’m not going to try to persuade people to have a different forecast,” he said. “But our forecast is that it will take some time and some patience, and that we’ll need to keep rates higher for longer.”

The second possibility is more awkward. Say both the Fed and the markets agree that it is using its comments about future rates as an instrument to suppress demand — but they still disagree about the direction of the economy. 

The third possibility compounds this problem. Not only do the Fed and the markets disagree about the economic forecast, but the markets suspect that the Fed is using interest-rate guidance dishonestly. High asset prices mean easier financial conditions and higher demand, which (other things equal) call for higher interest rates. Accordingly, if the markets can be led to expect higher interest rates, higher rates might not be needed.

Clive Crook Bloomberg 3 februari 2023

https://www.bloomberg.com/opinion/articles/2023-02-03/if-the-markets-suspect-the-fed-is-bluffing-it-has-a-problem 

Clive Crook isa  former chief Washington commentator for the Financial Times, he has been an editor for the Economist and the Atlantic.


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