The Fed will choose growth over inflation
Abraham George Macro Musings
It is almost certain that the Fed will raise rates by 25 basis points today. If they don’t raise at all that will not shock me but if they raise rates by 50 bps that will surprise me. Powell has already downplayed the possibilities of a 50 bps hike. So I don’t think he wants to create downside volatility in the markets and lose his credibility. What is most important is Powell’s comments after the announcement. Will he maintain an additional hawkish tone or will he be moderate?
We all know the Fed is in a dicey and precarious situation now. When the Fed should have actually tightened they didn’t. The Fed got stuck with the word ‘transitory’ for a long time. Since last December, they have struck that word out of their lexicon and have started to talk more realistically.
The Fed has two choices. They have to sacrifice growth or fight inflation. In the current situation, it is more likely they will hold off on aggressive rate hikes and bond purchases. The net effect should be a rally in stocks but inflation should continue to trouble. Even though the Fed will remain behind the curve, the markets are already tightening it for you. The ten-year yields are firmly established above 2% though these rates are still very low historically.
Eventually, a higher interest rates environment will weigh down on growth. We should see a repricing of a new capital market environment where higher rates will become the new normal. Though the Fed may not want to admit it, they want to buy more time to see if the inflationary pressures will continue to persist or will it cool off if the war situation subsides or what major impact does the sudden increase in COVID increases in China will create for the global economy.
Inflation was actually out of control even before the war in Ukraine but now it has made it worse. Apart from oil prices staying high, food price rises should also show up in stores around the world as Ukraine is a major food basket of the world.
Signs of diversification out of the USD as a user and as a reserve currency is starting to emerge or are at least becoming talking points around the world. There are talks that Saudi Arabia is thinking of payments in Chinese Renminbi instead of USD for its oil exports to China. India is already paying for its oil at a discounted rate from Russia in Indian Rupees. ‘Bond King’ Bill Gross has stated, “We need an alternative to the dollar” and that he is buying Bitcoin.
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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.