Here are three things the Fed’s done wrong, and what’s still not right

The Exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, DC, June 14, 2022.

Sarah Silbiger | Reuters

After years of being a beacon for the financial markets, the Federal Reserve soon finds itself second-guessed as it travels through the economy of a wicked bout of inflation and away from ever-darkening recession clouds.

A familiar tone, with economists, market strategists and business leaders weighing in on a series of policy mistakes.

Essentially, the Complaints Center has three themes on action, past and present: that the Fed did not act quickly enough to inflate the rate, and that it is acting aggressively enough now that a series of rate increases, and that it should The current crisis is coming.

“They should be known inflation is broadening and becoming more entrenched,” said Quincy Krosby, chief equity strategist at LPL Financial. “Why do you see this coming? This shouldn’t have been a shock. I think that’s a concern. I don’t know if it’s a stark concern. The Emperor has no clothes.” But it’s the man in the street vs. the PhDs. “

Consumers in fact have been expressing worries over price increases well before the Fed started raising rates. The Fed, however, stuck to its “transitory” script for months on end in a meager quarter-point rate hike in March.

Then this week, when the word leaked out, policymakers were getting more serious.

‘Just don’t add up’

The three-quarter-point increase Wednesday was a clear indication of a central bank that prides itself on a peculiar one.

After a few weeks of inspecting, the Wall Street Journal reported on Monday afternoon that a little sourcing is likely to be a more aggressive action than the planned 50-basis-point move. The report was followed by similar accounts from CNBC and other outlets. (A basis point is one-hundredth of a percentage point.)

Ostensibly, the move came about following a consumer sentiment survey showing that the longer-run inflation for ramping up. That followed a report that saw the Consumer Price Index gain 8.6% over the past year, higher than Wall Street expectations.

Addressing the notion that the Fed should have been more prescient about inflation, Krosby said it’s hard to believe that data points could have caught the central bankers so off guard.

“You just have to come up with something that just doesn’t add up, and they didn’t see this before,” she said, referring to the Federal Open Market Committee meetings during the period when members were prohibited from addressing the public.

“You could applaud them moving fast, not waiting six weeks [until the next meeting]. But then you go back, if it was that directive you couldn’t wait six weeks, how is it that you did it before Friday? “Krosby added.” That’s the market’s assessment at this point. “

Fed Chair Jerome Powell did himself no favors at Wednesday’s news conference when he insisted there was “no sign of a broader slowdown that I can see in the economy.”

On Friday, a New York Fed economic model showed that the inflation rate was 3.8% in 2022 and negative GDP growth in 2022 and 2023, respectively, at minus-0.6% and minus-0.5%.

The Dow Jones Industrial Average lost 4.8% for the week below $ 30,000 for the first time since January 2021 and wiping out all the gains since President Joe Biden took office.

Anybody’s guess as to why the market moves in a particular way. But at least some of the damage seems to come from the Fed with impatience.

The need to be bold

Though the 75 basis point move was the biggest one-meeting increase since 1994, there is a feeling among investors and business leaders that the approach still smacks of incrementalism.

After the Fed tightened, the 2-year yield rose to about 2.4 percentage points from its highest level in 2007. The fed funds rate, by contrast, is still only a range. Between 1.5% and 1.75%, well behind even the six-month Treasury bill.

So why not just go big?

“The Fed is going to have a lot of raise rates than they are now,” said Lewis Black, CEO of Almonty Industries, a Toronto-based global miner of tungsten and a multitude of products used in heavy metal. “They’re going to have to start getting up to the high single digits in the bud, because if they don’t, this one will get hold, it really gets hold, it’s going to be very problematic, especially with those.” the least. “

Black sees the inflation’s impact up close, and what it will cost him to capitalize on.

He expects the workers in his mines, based in Spain, Portugal and South Korea, to start demanding more money. That is why many have taken advantage of them and have access to mortgages in Europe and now have higher living costs as well as higher daily living costs.

In retrospect, Black thinks the Fed should have started hiking last summer. But he sees pointing fingers as useless at this point.

“Ultimately, we should be looking for stops to blame. There was no choice. This was the best strategy. They thought they had to deal with Covid,” he said. “They know what has to be done. I don’t think you can say that with the amount of money in circulation they can just say ‘let’s raise 75 basis points and see what happens.’ It’s not going to be enough, it’s not going to slow down. What you need now is avoidance recession. “

What happens now

Powell has repeatedly said he thinks the Fed can manage its way through the minefield, notably quitting in May when he thinks the economy has a “soft or softish” landing.

But with a second consecutive quarter of negative growth, the market is having its doubts, and there is some feeling that the Fed must be ahead of the painful path.

“Since we’re already in recession, the Fed might as well go broke and give up on the soft landing. I think that’s what investors are looking for in the short term,” said Mitchell Goldberg, president of ClientFirst Strategy.

“We could argue that the Fed went too far. “The Fed is way behind the inflation curve. They have to move quickly and they have to move aggressively, and that’s what they’re doing.”

While the S&P 500 and Nasdaq are in bear markets – down more than 20% from their last highs – Goldberg said investors shouldn’t have much.

He said the current market will run, and investors will keep their heads and stick to their longer-term goals.

“People just had this sense of invincibility, that the Fed would come to the rescue,” Goldberg said. “Every new bear market and recession seems like the worst one ever in history and those things will never be good again. It always happens. “

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