Death by 1,000 Cuts
Inflation is still coming in hotter than the experts had predicted and it’s on the rise not only in the U.S. but throughout the world; even in sleepy Europe, inflation is nearing 6%!
Europe depends heavily on Russia for natural gas, and the Nord Stream 2 pipeline project is basically dead in the water.Meanwhile, Russia may choose to choke off the flow of energy to the Eurozone at any moment, which would raise prices drastically.
Even more impactful news came out of Jerome Powell’s testimony, which made it clear that the markets have fully priced-in a 25bps rate hike on March 15th — my point is that the rate hike won’t do much to markets and what investors are really thinking about is June’s rate hike.
Just a month ago, the big banks were insistent that the Fed would announce a 50-basis-point interest rate hike at its upcoming March FOMC meeting. These analysts were so certain that a half-percent hike was coming, but they weren’t prepared for geopolitical events to change the landscape the way they did.
Powell further stated his expectation that there will be a series of Fed Funds Rate increases afterwards, but he didn’t say how many rate hikes should be anticipated. This was to be expected since Powell doesn’t want to be responsible for spooking the financial markets with hawkish-sounding predictions or language.
Powell suggested that they’ll be more like the tightening cycle of the beginning of the century: there was a 50-basis-point rate hike in 2004 followed by 17 consecutive 25-basis-point hikes.
Powell’s forecast is basically hiking by a quarter-percent every six or seven weeks. The purpose of this is to constrain the real estate and housing market, auto lending and level-off demand, which would be the Fed’s way to control rising inflation.
Don’t expect an immediate rug pull from the Fed in the form of an immediate 50-/75-basis-point rate hike. That’s not how Powell is going to combat rising inflation since he’s not going to risk spooking the stock market too quickly.
The most important insight I got from Powell is that he knows that the markets wants him to be clear and transparent and that’s how the FED will continue to be.
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