The Dow drops 1,160 points in the worst trading day since June 2020
Bank of America analysts wrote in a note that they fear there will soon be a wage-price spiral in the United States due to the risks that “the Fed will raise too little”. The current market reaction, they said, suggests that “investors view the Fed moving too slowly in the fight against inflation”: a 75 [basis point] hike might have been dreaded but it seems like it would have been preferred.”
Nomura Securities predicted that the central bank will raise the federal funds rate by three-quarters of a point in June and July after the half-point hike in May.
“We recognize that Fedspeak has not yet approved a 75 basis point hike, but in this high inflation regime, we believe the nature of the Fed’s forward guidance has changed – it has become more data dependent and more agile,” said Rob Subbaraman, Global Head of Nomura. market studies, in a note.
The Fed could raise rates to 5% by the end of the current tightening period, said Deutsche Bank’s chief economist. It would be the highest level since 2006.
So why are markets fighting the Fed Chairman’s assurances that a bigger hike won’t happen in June – and hurting themselves predicting that it will?
“When a Fed official suggests a 50 basis point hike, markets immediately start trying to price in 75 basis point hikes,” said Jamie Cox, managing partner of Harris Financial Group. “It really is madness.”
The Dow Jones fell 5,095 points, or 14% in 2022. The S&P 500 fell more than 18% and the Nasdaq Composite lost about 28%.
“Powell tried to take the 75 basis point rise off the table at the last press conference,” said David Lebovitz, global market strategist at JP Morgan Asset Management.
The problems between the markets and the Fed may have less to do with an eye for self-flagellation and more to do with a growing mistrust of the institution. The old “don’t fight the Fed” mantra has turned into “don’t believe the Fed”.
“People are starting to lose faith in the idea that the Fed really has its arms around inflation,” Lebovitz said. “It’s about getting a handle on what the Fed is going to do and unfortunately, given the lack of clear guidance from the Fed and an inflation report that surprised on the upside, investors are feeling a bit uneasy. easy.”
“And I think they agree that was a mistake.”