Is a 1.00% Rate-Hike Coming Next?
The dollar squeeze is getting absurd! This is 100% guaranteed to lead to a policy error. At this point, I am gearing up for a summer blowout moment, where the markets reject what the FED is doing… for most, this is considered a crisis point, a time at which the financial system is brought down to its knees, but what it actually means is that the FED is no longer behind the curve.
In other words, I consider what we’re going through right now as the crisis, as the part of the process at which we are tip-toeing towards that moment, when the FED policy is aligned with market conditions.
The economic expansion of 2009-2022 created so much wealth that Jerome Powell is highly certain that the robustness of the enterprise system can and will absorb these higher rates.
This clear advantage that the U.S. economy has over the other developed countries is ushering the period of the strongest USD index in history!
The stock market’s worst performance comes in times of a stronger dollar, just like in 2018 and in 1969, for example.
What’s alarming to me is that the market is able to continue to absorb it, which means the bottom is not in yet…
We need the markets to say “enough is enough” and, after last week’s CPI report, the Federal Reserve is flirting with the possibility to hiking a FULL BASIS POINT (1.00% increase in July)!
Courtesy: Zerohedge.com, Bloomberg
What most got wrong is how long the process will take and how high interest rates will go!
Initially, Jerome Powell, if you remember, mentioned 2-3 rate hikes… then, Jamie Dimon came out in January 2022 and changed the world’s perspective, by dumping a nuke and claiming it will require 5-7 rate hikes.
At that point, both Powell and Dimon were, by definition, talking about 0.25% rate hikes, even without saying so.
The possibility of raising by 0.50% or by 0.75% was so foreign to market expectations that when one said a “rate hike,” he only meant of 0.25%.
Both Jerome Powell, who was of the opinion that raising to 0.75% would be sufficient (we are already at 1.50%) and even Jamie Dimon, who talked about 5-7 hikes, will have been too conservative, because in 9 days, the FED Funds Rate will either be 2.25% or 2.50%, the 2018 market breaking point.
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If this doesn’t create this capitulation moment, it means that in September, interest rates are going even higher. This is the reason that the markets can’t find their footing… there’s a selling competition going on and it’s on a global basis… it won’t bottom, until we reach that magical point of agreement between the central banks and the financial environment in the real economy.
This is how the free markets cleanse the excessiveness, the froth, the euphoria and strip everything to the bone.
After this, you’ll have a clear picture of how much things are really worth and we can turn a page and start expanding again.
We are living in unprecedented times and in 9 days, we will know just how crazy they are!
Remember this period, because it might be the last time you’ll see double-digit inflation in the U.S. in your lifetime!
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