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Here are three things the Fed did wrong and it’s still incorrect

The exterior of the Mariner S. Eccles Federal Reserve Building will be seen in Washington, DC on June 14, 2022.

Sarah Sylbiger | Reuters

After years of financial market beacons, the Federal Reserve is suddenly second speculated as it tries to navigate the economy away from the darkening recession clouds, through the evil attacks of inflation. increase.

Fed complaints are in a familiar tone, focusing on what economists, market strategists and business leaders perceive as a series of policy mistakes.

In essence, dissatisfaction is focused on three themes of past, present and future behavior: the Fed did not act fast enough to curb inflation, and a series of rate hikes is now sufficient. Not actively acting on, and it should have been good at seeing the current crisis coming.

Quincy Crosby, Chief Equity Strategist at LPL Financial, said: “Why didn’t you see this coming? This shouldn’t have been a shock. I think it’s a worry. Whether it’s as serious a concern as” the emperor has no clothes ” I do not understand. But it’s a man vs. PhD on the street. “

In fact, long before the Fed began raising rates, consumers had expressed concern about price increases.But the Fed stuck to a “temporary” script on inflation for months before finally enacting a few. A quarter point rate hike in March..

Then things suddenly accelerated earlier this week when the word that policy makers were getting more serious was leaked.

“Do not add”

The road to an increase of three-quarters points on Wednesday was a unique one, especially for central banks who are proud of their clear communication.

There was little funding and authorities were more aggressive than the planned 50 basis point move, according to a report from The Wall Street Journal on Monday afternoon, after authorities claimed that a 75 basis point increase was not at the table for several weeks. Judging that it is necessary to take appropriate action.After the report Similar account from CNBC And other outlets. (Basis points are one-hundredth of a percentage point.)

On the surface, this move follows Friday’s consumer sentiment survey, showing rising expectations for long-term inflation. that is, May consumer price index rose 8.6% Over the past year, it has exceeded Wall Street expectations.

Crosby responded to the idea that the Fed should have had more foresight on inflation and said it’s hard to believe that datapoints could have been very surprised at the central bank. ..

She mentioned when members were forbidden to speak to the general public before the Federal Open Market Committee meeting.

“You can praise your quick move without having to wait six weeks. [until the next meeting].. But if it was miserable that you couldn’t wait six weeks after that, why didn’t you see it by Friday? “Crosby added.

Federal Reserve Board Jerome Powell He himself did not show favor when he claimed at a press conference on Wednesday that “there are no signs of a broader slowdown as seen in the economy.”

On Friday, New York Fed Economic Model In fact, it shows an increase in inflation of 3.8% in 2022 and negative GDP growth of minus 0.6% and minus 0.5% in 2022 and 2023, respectively.

The market did not look down on the Fed’s behavior on average 30 Dow Jones Industrial Averages Lose 4.8% of the week It fell below 30,000 for the first time since January 2021 and wiped out all the profits achieved since President Joe Biden took office.

It’s generally everyone’s guess why the market moves in a particular way in a particular week.But at least some damage Impatience for the Federal Reserve..

Must be bold

but 75 Basis point move Despite the largest increase in one meeting since 1994, investors and business leaders still find this approach to be a gradualist smack.

After all, the bond market is already priced at a Fed tightening of hundreds of basis points, with two-year yields rising about 2.4 percentage points to the highest level since 2007. Between 1.5% and 1.75%, far behind the 6-month Treasury bill.

So why doesn’t it grow?

Lewis Black, CEO of Almonti Industries, a global miner of tungsten, a heavy metal used in many Toronto-based products, said: .. “To pinch this in a bud, you need to stand up to the first digit. Otherwise, if it gets stuck, and if it actually gets stuck, it can be especially problematic. At least.”

Black sees the effects of inflation up close, beyond the cost of his business for capital.

He expects his mining workers, mainly based in Spain, Portugal and South Korea, to start demanding more money. That’s because many of them have mortgages that are easily accessible in Europe, and now housing costs are high and daily living costs are rising sharply.

In retrospect, Black believes the Fed should have started hiking last summer. But he thinks pointing his finger at this point is useless.

“Ultimately, you should stop looking for who to blame. There was no choice. This was the best strategy they thought they had to deal with Covid.” He said. “They know what they have to do. I think you probably can’t say with the volume they can just say.” Raise 75 basis points and see what happens. Let’s do it. “That’s not enough, it doesn’t slow down. What we need now is to avoid a recession. “

What happened now

Powell has repeatedly stated that the Fed can pass through minefields and believes the economy could land “soft or soft”, especially in May.

But when GDP wobbles Negative growth for the second consecutive quarterThe market is skeptical and the Fed feels it should admit the painful path ahead.

“We’re already in recession, so the Fed may go bankrupt and give up on soft landing. I think that’s what investors expect in the short term,” said Client First Strategy President. Mitchell Goldberg said.

“I could claim that the Fed went too far. I could claim that too much money was distributed. That’s it, and now we have to fix it. We’re looking forward to it now. Must be, “he added. “The Fed is far behind the inflation curve. They have to act quickly and they have to be proactive. That’s what they do.”

The S & P 500 and Nasdaq are in a bear market, down more than 20% from their previous highs, but Goldberg said investors shouldn’t be too desperate.

He said the current market movement is over, keeping his head and recovering investors who stick to long-term goals.

“People had this invincibility that the Fed would come to the rescue,” Goldberg said. “All new bear markets and recessions seem to be the worst in history, and things will never get better. Then we get out of each of the new stock market winners and the new winner sector of the economy. happen.”

Here are three things the Fed did wrong and it’s still incorrect

Source link Here are three things the Fed did wrong and it’s still incorrect

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