Jay Powell keeps his job and faces the inflation quandary – hiking rates too soon risks recovery, but inflation needs addressed. The likelihood is lower rates for longer – which will juice euphoric markets further. What’s the alternative? Stop buying financial assets and buy the real economy!
As markets shake off their summer slumbers, what should we be worrying about? Lots..! From real vs transitory inflation arguments, the long-term economic consequences of Covid, the future for Central Banking unable to unravel its Gordian knot of monetary experimentation, and the prospects for rising political instability in the US and Europe.
Fed Head Jerome Powell set the market wagging y’day, triggering a mini-taper tantrum in bonds and stocks when he revealed no immediate rate hike but the possibility/likelihood of 2 rate rises in 2023. Bonds and Stocks fell. Bonds are unlikely to get much better in coming months – unless we see a market wobble that forces Central Banks to intervene, or something that creates a flash flight to quality. We are now in new market phase – the correlation between bonds and equities is looking vulnerable to a reversal when the free money that’s fed the rally since 2010 dries up! This is getting….. “interesting”.