Markets were disappointed by a belligerent Fed.
So as I predicted it would last week, the RBA hiked rates by another 25 basis points.
It doesn’t look like their done.
I guess we could be thankful we’re not in the US, where the Fed delivered another 75 basis points, as they scramble to catch up with inflation.
It’s been a heckuva ride in the US. The official cash rate was at 0.0% in March. It’s now at 3.75%, and heading north with a rocket.
There have only been five times in the past 30 years where the Fed has hiked by 75 basis points or more. Four of those occasions have been in the last six months.
Markets got absolutely pummelled by the news. The NASDAQ closed down 3.4% at the end of the day.
But the 75 bips was expected. What wasn’t expected was how hawkish Fed Chair Jerome Powell would sound in in his post-hike press conference.
Stocks had edged higher all weak, slowly gathering confidence in the idea that a ‘pivot’ might be coming. That is, we might be about to stop hiking, and possibly start dropping rates.
Powell’s conference blew that idea completely out of the water.
“We think we have a ways to go, we have some ground to cover with interest rates, before we get to that level of interest rates that we think is sufficiently restrictive.
“I’ve also said that the level of rates that we estimated in September, the incoming data suggests that’s actually going to be higher.
“There is no sense that inflation is coming down. I have a table of the last 12 months of readings, there’s really no pattern there. We’re exactly where we were a year ago.
“I would also say that it’s premature to discuss a pause. It’s not something that we’re thinking about.
Yep. Hearing you loud and clear there Jerry.
But perhaps what was more shocking was his suggestion that it was easier to crash the economy and then get it going again, than it was to slow it down if it got too hot and inflation became ‘entrenched’.
The Fed’s preference is to crash or crash through – to hike until they break something, whether that be breaking the back of inflation, or breaking the back of the economy.
And you’ve got to remember, there’s a very real chance we end up breaking something pretty fundamental to the global economy here. A few weeks ago we almost broke the UK Pension system, which would have been complete chaos.
… though it would have taken the heat out of inflation, so that would have been nice.
But for now, Jerome, Phil and the central banks are torpedoing any hope that rates might turn soon.
It’s hike it til you break it.
Let’s hope inflation gives up the ghost first.
JG.