As far as the market discounting and consensus view is concerned, it is almost a given that the Fed will raise rates by 50 basis points later today. The Fed rarely surprises the market from what they have already communicated. As far as I can remember, this is the first time the Fed is hiking when you have had a negative GDP number. The GDP number is open to all sorts of interpretations as most major economists argue that the negative number was due to many distortions.
Why are we in this situation? The Fed spent most of last year trying to convince us that the rise in inflation was due to supply-chain disruptions and base effects - the inflation data was misleading as measured against depressed prices of the lockdown period. All along Powell made it very clear that there was nothing the Fed could do to solve the supply chain issues.
Now we are in a position where the market is fearing that the Fed can get too hawkish? If they do, it will be a crash landing and not the soft landing that they had been aiming for.
Interestingly the Fed should be announcing a withdrawal of $95 bln in terms of QT (Quantitative Tightening) starting June, as per their earlier announcement. The last QE was in March. After just two months, they are reversing course. Jay Powell clearly knows how this ended up in 2018 and he will be very careful with his choice of words and announcements.
The supply chain disruptions from the lockdown period have now been exacerbated by the war in Europe and new lockdowns in China. The high energy prices are mainly due to the self-inflicted shortage that they created by the global plans on ESG and anti-fossil fuel policies. Compound to that, we have total disruptions from one of the biggest suppliers of oil and gas: Russia.
Given all this, Powell is clearly not going to create a ‘Volcker moment’ for the markets. As we head into today’s announcement later in the day, I think there are two more outcomes that have an above zero possibility. The Fed could be raising rates by 25 basis points or not raise rates at all. Given the markets’ oversold conditions and negative sentiments, any soft language from Powell on further hikes and QT will be very bullish for equities.
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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.