Economy Update - Are Markets Open For A Fed Reset? Systematix's Analysis
Fed’s tightening thus far has not been good enough.
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Systematix Research Report
Fed’s tightening thus far has not been good enough. The sustained strength in the labor market and household consumption trumps the deep recession outlook, thereby elongating the extant inflationary impulses.
Powell’s latest communique ups the tightening game. This is set to alter market expectation across asset classes Jerome Powell’s speech on the Monetary Policy Report is an admission that the U.S. inflation problem is far more complicated than what the markets and the Federal Reserve had been factoring in.
The 'know it better than the Fed' attitude of the market has been seasoned by the pre-pandemic experiences, specially of 2019 when the fed had to reverse the rate hike cycle following the market expectations. But those benign expectations are getting reset to a paradoxically opposite reality.
The acknowledgement now that the terminal rates could be much higher than earlier anticipated given the totality of economic data is a corroboration of our Jan 2023 theme that 'Markets are premature in pricing in Fed's leniency' and that the terminal rate for 2023 could be much higher than 4.3% assumed by the markets two month back.
The last summary of economic projections of FOMC (SEP in Dec-22) had held an average dot plot at 5.2% and a central average of 5.1%. Hence, unlike the risk markets that still believes that the Fed would eventually relent, Powell’s latest communication has fortified his view that historical records caution against premature loosening, and that the Fed will stay the course till the job is done.
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