OPINION: Jerome Powell set markets surging by suggesting the pace of rate rises might slow. But one fund manager says markets are underestimating the Fed’s challenges.
Federal Reserve chairman Jerome Powell once again tripped himself up in his press conference to discuss the 0.75 percentage point rate rise announced on Wednesday night.
There are several reasons that a rally of the magnitude we saw on Wednesday night is silly, the first being that rising markets mean looser financial conditions – and that’s exactly what the inflation-fighting Fed doesn’t want.P 500 is now up almost 10 per cent since the middle of June as investors and traders bet that by front-loading rate rises, the Fed is getting closer to cutting rates as the US economy weakens.
The bigger reason this rally is risky is because it underestimates what the Fed might need to do to calm inflation in the US, which sits at a four-decade high of 9.1 per cent., showed a fascinating chart to investors during his visit to Australia this week, which showed the Fed’s interest rate and CPI at the end of the past eight tightening cycles.
Holowesko believes inflation will prove stickier than the market believes, pointing out that 68 per cent of the items that make up US inflation are still inflating. And while he concedes that the US economy’s debt load – up from $US6 trillion in 2008 to $US28 trillion today – will exaggerate the impact of rate rises, he’s not buying the market’s conviction that the Fed will soon be cutting.
“From my perspective, I believe we are about a third of the way through this unwinding in the US. We haven’t seen the speculative excesses completely removed.”Holowesko also sees the potential for a Fed mistake of the 1970s to be repeated. He says the Fed raised rates to fight inflation, only to cut them again amid early signs of economic weakness.
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