Any attempt to explain market volatility in recent times, and even more so since the beginning of the year, has been linked to a policy of the US Federal Reserve (FED) that has changed from end to end in order to curb inflation. The Fed’s main challenge is to curb high inflation in the US without dragging the economy into recession. To do this, the Fed needs to raise interest rates to a “neutral” level, ie one that will not suppress growth at the same time. The contraction in economic activity, but that is not what stopped Powell from pursuing a further policy of austerity.
Last night’s interest rate hike in the US was in line with expectations of a 0.5% hike – the highest hike rate since the dot.com crisis. Which is similar to raising interest rates, and what affected upward bond market yields. There were no surprises in the announcement and the market liked it.
Beyond that, after at the press conference stage Powell ruled out raising the interest rate to a higher level of 0.75% – as investors feared it would be later, investors drew optimism and wanted to buy shares. Maybe the situation is not so serious and there is no need for a more aggressive increase that will suppress inflation but stifle growth? This is what investors thought to themselves.
After raising the interest rate yesterday, the Fed interest rate is in the range of 1% -0.75% when the inflation rate last month reached 8.5%. The real interest rate (neutralization of inflation) is lower than minus 7%, ie far from a point where the interest rate will be considered neutral. This reflects how backward the Fed has been in its responses to restraining inflation since the days of “temporary inflation” that came to an end late last year.
The main concerns are that the Fed has in fact delayed the date by delaying with interest rate hikes and meanwhile inflation has entertained upward, thus any attempt to curb it will lead to a slowdown. Will the Fed find itself rebroadcasting from 2018 and the market need soul machines again?
Powell has shown determination to continue with interest rate hikes in the next prematurity at a high rate of 0.5% – all in order to curb inflation. But if until this morning investors seemed to be buying Powell’s remarks about a “soft landing” for the economy, and the Fed manages to raise interest rates to curb inflation without smashing the economy, despite Powell’s desire to broadcast transparency, at this point voices are growing that the Fed will not necessarily succeed Navigate the economy to a soft landing, especially when the hit to the U.S. economy was already felt in the first quarter of the year.
Just yesterday Fed Chairman Jerome Powell said he did not think the credibility of the central bank had been harmed (despite the mistake in forecasting inflation), and here today the picture looks rather bleak, and actually reflects the Fed’s distrust. Although Powell’s tone was less hawkish than expected, Investors have internalized that the main risk factors, such as high inflation, uncertainty about the war in Ukraine, and the development of the corona in China – each in itself enough to pose a significant threat to the economy.
Indices in New York crashed sharply today, yields on 10-year and 30-year bonds soared (and bond prices fell accordingly), and the fear index soared above 30 points. -10 years over 3%. The bond market, which competes with the investor’s heart with the stock market, now looks more attractive given the jump in returns that may be a better investment if locked in for 10 years given the uncertainty in the global economy.