I was wrong about persisting that the Fed will hike only 50 bps. I had the sense that I will be wrong but still stuck with it.
What I didn’t realize is that the Fed had let most of the major banks know that they are hiking by 75 basis points. Otherwise, how will the market swing from a 92% probability of a 50 bps hike to a 92% probability of a 75 bps hike in just a day? The Fed wanted to take the shock element of a market reaction in equity markets to the downside. They pretty much succeeded in that. With almost 80% of the major banks expecting a 75 bps hike, it got discounted very quickly.
But let’s take a look at the current state of affairs. We had the biggest hike in 28 years and we are still at 1.5% in an official inflation world which is north of 8% (the real inflation is much higher and we don’t want to talk about that)
After the hike Chairman Powell made some prepared comments and conducted an hour-long Q&A session.
In giving a title to yesterday’s unusual hike the Fed Chairman said that hike was “front end loading”. What does that mean? Does it mean the Fed is done with further hikes? The rest of the comments does not give much clarity but it is not impossible.
Do you think when inflation continues to post much higher levels (above 8.6%) taking the Fed funds rate to 1.5% and labeling it as ‘front end loading’ is anything aggressive?
The Fed’s focus is clearly not on the interest rates to bring inflation down. Powell clearly said earlier that they were targeting the demand side of the economy to bring the job market down ( increase unemployment). That surely resulted in a weaker stock market and tighter financial conditions.
This has resulted in repeated inverted yield curves which have proved to be a precursor for recessions. We already had a contraction in GDP in Q1 and Q2 will likely be negative as well. By definition two consecutive quarters of negative growth is considered a recession.
The Fed has no straight answers for anything but they are experimenting with many things as they somehow want to keep it all together. The corporate bond market has already plunged to pandemic crisis levels. Do you think the Fed will allow that to collapse?. It is very unlikely they will. Remember during the pandemic they crossed some lines in buying outright corporate bonds.
How’s it looking in Europe? The very talk of ending QE next month has forced the weaker sovereign bond yields to rise in Europe. The ECB has already called for an emergency meeting to plan an adequate response. It will be the same wine in a different bottle. All we have seen is more QE and no successful QT. I don’t think with the mess that they have created it is possible to have an easy exit. There will be more QE but it will be packaged differently.
What about Japan? Speculators and hedge funds are trying to break BOJ’s resolve. Can the speculators win? My experience so far tells me if the major central banks get together they will continue to ward off the speculators. Otherwise, situations like what happened to the Bank of England in 1992 can happen.
Finally, where are we heading? I don’t think the time is that far off when we will move out from a reset of global debt and move to an asset-based new monetary system. Keep your eyes and ears open and prepare yourself for it.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.