Bank of America analysts wrote in a note that they fear there will soon be a wage-price spiral in the US because of risks that “the Fed hikes too little.” The current market reaction, they said, suggests that “investors see the Fed as moving too slowly on the inflation fight: a 75 [basis point] hike might have been feared but it appears it would have been preferred.”
Nomura Securities has predicted that the central bank will hike the fed funds rate by three-quarters of a point in June and July after the half-point rise in May.
“We recognize Fedspeak has not outright endorsed a 75 basis point hike yet, but in this high inflation regime we believe the nature of Fed forward guidance has changed — it has become more data dependent and nimble,” said Rob Subbaraman, Nomura head of global markets research, in a note.
The Fed could hike rates to 5% by the time it ends the current bout of tightening, Deutsche Bank’s chief economist said. That would be the highest level since 2006.
So why are markets fighting the Fed chair’s assurances that a larger hike won’t come in June — and hurting themselves by predicting 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 for Harris Financial Group. “It’s madness really.”
The Dow has fallen 5,095 points, or 14% in 2022. The S&P 500 has dropped over 18% and the Nasdaq Composite has lost about 28%.
“Powell tried to take the 75 basis point hike off of the table at the last press conference,” said David Lebovitz, a global market strategist at JP Morgan Asset Management.
The issues between markets and the Fed may have less to do with an eye toward self-flagellation and more to do with a growing mistrust of the institution. The old-time mantra of “don’t fight the Fed” has morphed into “don’t believe the Fed.”
“People start to lose faith in the idea that the Fed really does have its arms around inflation,” said Lebovitz. “It’s all about getting a grip on 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 little bit uncomfortable.”
“And I think they agree it was a mistake.”