The Fed got it wrong all the way. Now a policy change is needed. Once the Fed decides on a policy change, they announce it well in advance of the actual decision. Anyone who does not see a Fed decision coming has not been paying attention. Jay Powell delivered remarks last week that rate hikes might come quicker than anticipated. The market already knew that the Fed was on a path of hiking rates. The first increase was on March 16, 2022. Markets fully-expected further rate hikes on May 4 and June 15 and beyond. Markets had even priced in a 0.50% hike on May 4 compared to the 0.25% hike on March 16. Since the markets had already priced in 0.50% for May, the only way to interpret Powell’s remarks is that there would be another 0.50% hike in June and possibly July as well. Some analysts interpreted Powell’s remarks as a warning that a 0.75% hike might even be on the cards. This kind of tightening required markets to reprice their expectations and so they did. The Dow Jones Industrial Average fell 981 points the day after Powell’s remarks and the NASDAQ and S&P 500 took similar dives in percentage terms. Powell’s rate hike plan is intended to squash inflation currently running at over 8.5%. But to squash 8% inflation, rates have to rise 10% in order to achieve a real rate of 2%. And there is no way the Fed could get rates to 10% without a massive recession and a market crash. The market will probably crash a long time before. The faster the Fed raises rates, the bigger the shock will be and the sooner the crash will come.
Sven Franssen