All the unknowns about the Fed effect

Why the Fed decided to hike rates and what are the expectations and fears of the markets now. The comment of Charles Hepworth, Investment Director of Gam

In its latest battle against the sprite of mostly supply-driven inflation, the Federal Reserve speculated that a 0.75% hike would rebalance market volatility, which quickly became too high. The assumption that such an aggressive rate hike shock will bring the Fed back to the curve at least, if not early, is debatable: the market believes it is still far behind the curve.

Now it could be argued that the Fed is looking desperate when just a month ago it hinted that 0.5% would be enough. Does an extra 0.25% mean that much? Yes, because if the message the Fed has been trying to convey now cannot be taken completely seriously, then the only possible outcome is further volatility: the market is now able to price the Fed's conclusions.

The dot plots showed increases: at least another 1.75% rise is expected before the end of the year with rates at 3.4% compared to the 1.9% forecast for the end of the year only three months ago.

Growth forecasts have also changed significantly, with growth expected to be 1.7% this year, compared to 2.8% forecast in March.

A Fed that aggressively hikes rates trying to recover in the face of a slowing economy represents a rather unique monetary policy path. The good news is that the market, now in bearish territory, has priced what the Fed doesn't seem to have done. Earnings need only hold up relatively well from here on out, now that a multiple contraction has already manifested: unfortunately, however, this is precisely the great unknown.

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This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/fed-aspettative-timori-mercati/ on Sun, 19 Jun 2022 05:21:00 +0000.