Analysts at Bank of America wrote in a note that they fear a US wage and price spiral soon due to risks of “the Fed raising too little.” The current market reaction, they said, suggests that “investors see that the Federal Reserve is moving too slowly in the fight against inflation: a 75 [basis point] The walk could have been dreaded, but it seems that it would have been preferable.”
Nomura Securities has forecast that the central bank will raise the fed funds rate by three-quarters of a point in June and July after raising a half-point in May.
“We recognize that Fedspeak has not yet fully endorsed a 75 basis point hike, but in this high inflation regime we believe the nature of the Fed’s forward guidance has changed – it has become more data dependent and agile.” said Rob Subbaraman, global director of Nomura. market research, in a note.
The Fed could raise rates to 5% by the time the current tightening streak ends, Deutsche Bank’s chief economist said. That would be the highest level since 2006.
So why are markets fighting back against the Fed chairman’s assurances that a bigger hike won’t happen in June, and getting hurt by predicting that it will?
“When a Fed official suggests a 50 basis point hike, markets immediately start trying to price in 75 basis point hikes,” said Jamie Cox, managing partner at Harris Financial Group. “It’s really crazy.”
The Dow is down 5,095 points, or 14% in 2022. The S&P 500 is down more than 18%, and the Nasdaq Composite is down about 28%.
“Powell tried to take the 75 basis point hike off the table at the last news conference,” said David Lebovitz, global market strategist at JP Morgan Asset Management.
The problems between the markets and the Fed may have less to do with self-flagellation and more to do with a growing mistrust of the institution. The old mantra of “don’t fight the Fed” has morphed into “don’t believe the Fed.”
“People are starting to lose faith in the idea that the Fed really has its arms around inflation,” Lebovitz said. “It’s about controlling what the Fed is going to do and unfortunately given the lack of clear guidance from them and an inflation report that surprised to the upside, investors are a bit uneasy.”
“And I think they agree that it was a mistake.”