The market still views the central bank as behind the curve.
In its latest battle with the mostly supply driven inflation genie, the Federal Reserve (Fed) assumed that a 75 bps hike would calm market volatility that has very rapidly become too high. Assuming that this hawkish rate hike shock will restore the Fed’s record of being at least on the curve, if not ahead of it, is a moot point. The market believes that it is still very much behind and now it could be argued the central bank is looking desperate when just a month ago it suggested that 50 bps would be sufficient. Does an extra 25 bps more mean that much? Yes, because if the telegraphing that the Fed has tried to convey now cannot be totally taken at face value, then further volatility can be the only outcome in our view – the market is now in control of pricing the Fed’s outcomes.
Dot plots have increased to show they expect at least another 175 bps increase before the year is out to see rates sitting at 3.4% compared to 1.9% expected for year-end just three months ago. Growth forecasts have similarly been massively altered with 1.7% growth for this year now expected compared to 2.8% expected back in March. An aggressively hiking Fed playing catch-up in the face of a slowing economy is a strange policy path. The good news is the market, in bear market territory now, has priced in what the Fed seems not to have done. Earnings just need to hold up relatively well from here now that the multiple contraction has already happened but sadly that remains the big unknown.
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