Are We at the Point Where Central Bankers Can Do No Right?

TL;DR

The Federal Reserve has hiked the fed funds rate by 25 basis points, causing positive market responses. Darius Dale discusses the impact on asset markets, the Fed's messaging on inflation and growth, and the potential risks ahead.

Transcript

welcome to the real vision daily briefing it's wednesday march 16 2022. i'm ash bennington it's fed day the fomc has pulled the trigger hiking the fed funds rate 25 basis points we're joined by someone who follows all of this very closely darius dale founder and ceo of 42 macro but first let's take a quick look at what's happening in u.s equity mar... Read More

Key Insights

• 📼 The Fed's decision to tighten monetary policy indicates a commitment to reducing inflation but also poses risks to asset markets and investor sentiment.
• 🫓 The flat yield curve indicates market expectations of a slowdown in economic growth and tighter financial conditions.
• 🌐 The global economy has been experiencing a cyclical slowdown since mid-2021, which is likely to exacerbate in the near future, affecting risk asset valuations and investor sentiment.
• ✋ The current valuation levels in the stock market suggest a potential downside of 30% from current highs, driven by the potential slowdown in economic growth and high valuations.
• 😘 Gold has a favorable outlook in the medium term due to lower real interest rates and reduced demand for the dollar.
• 🛄 The Chinese government's interventions and regulatory relief measures in financial markets aim to stabilize market volatility and address concerns about tightening financial conditions.
• 🔬 The Fed's approach to monetary policy tightening may not effectively curb supply-side inflation, and the impact on labor markets may not be immediate but could intensify in the future.
• 🫒 The market's relief rally in the absence of negative geopolitical events may be short-lived, as the fundamental outlook for the economy continues to deteriorate.

Questions & Answers

Q: Did Powell give any indication that he would crash the economy in order to reduce inflation?

Powell did not suggest crashing the economy, as the Fed aims to balance inflation control with economic stability and job market health. The yield curve flattening after the meeting indicates market expectations of future tightening and a potential economic slowdown.

Q: What is the significance of the dot plot projections for interest rates?

The dot plot reflects the consensus of Fed officials on interest rate projections but may not accurately represent the future path of rates. Based on current data and market conditions, it is unlikely that any amount of rate hikes will effectively curb supply-side inflation.

Q: How will the saudis pricing crude oil in Chinese yuan impact the U.S. crude pricing and suggest China's shifting alliances?

The change in pricing crude oil in Chinese yuan indicates reduced demand for the dollar and could lead to a lower dollar value. This shift, combined with potential geopolitical risks and lower real interest rates, provides a bullish outlook for gold.

Q: What are the implications of the Fed's tightening policy on labor markets?

While concerns about rising rates impacting labor markets are valid, the timing of such impacts may not be immediate. The economy is expected to slow down and real interest rates to decline, which could eventually lead to a rise in the unemployment rate.

Summary & Key Takeaways

• Fed Chair Jerome Powell successfully balanced appeasing political and investor demands for inflation control while assuaging concerns about near-term recession risks, leading to positive market responses.

• The Fed's decision to maintain a positive economic outlook and not forecast a recession indicates a commitment to avoiding a rise in unemployment rates.

• Options expiration (opex) on Friday could lead to a positive market trend in the absence of negative geopolitical events, but there may be increased investor demand for protection next week as some put options expire.