King for a day ― Fed bumps up rates the fastest since 1994

King for a day ― Fed bumps up rates the fastest since 1994

Time to read: Minutes
Douglas Cote

Douglas Coté, CFA

Head of Global Perspectives Strategies

Jay Powell, the Federal Reserve chairman, was king for a day with his aggressive 75 basis point (bp) increase in the Fed funds rate. This was the biggest jump since 1994, when Alan Greenspan chaired the Fed. At first, markets responded enthusiastically to the announcement, especially to Powell’s suggestion that 75-bp hikes wouldn’t become commonplace.

The party lasted exactly two hours on Wednesday, from 2:00 PM to market close at 4:00 PM. Stocks faltered again on Thursday as investors began to reassess the outlook for growth and profits. Oil prices ― a significant source of inflationary pressure ― turned upward on Thursday, though they remained lower on the week. In my view, the market is signaling that even though higher interest rates could raise the exchange value of the U.S. dollar, that may not be enough to offset the supply constraints which are driving oil prices higher.

Without a clear path to lowering oil prices, the risks rise that the Fed will not be able to engineer a soft landing, and instead we may see “demand destruction,” aka a recession. Bottom line, there is an increased probability of more pain to come.

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