The markets have been on a rollercoaster ride over the past couple of weeks. Initially there was a significant drop in equities and a rise in bond yields following the US Federal Reserve (Fed) statements on the 2nd of November. This was quickly followed by a large rise in the equity markets and a drop in bond yields following the latest inflation numbers being released on the 10th and the 15th of November. So what do we make of these large market moves? Is there any underlying theme which the markets are telling us? Is the Fed behind the curve? Are markets getting ahead of themselves? Or is this just noise caused by speculation and the unwinding of large positions?
The latest US Federal Reserve statements on the 2nd of November are significant because of the amount of macroeconomic uncertainty which serves as a backdrop to their policy. Powell appeared cautious about how quickly inflation will come down and how long interest rates will have to stay elevated to bring down inflation. This was in marked contrast to the markets which had previously expected the US Fed to start cutting rates as soon as it had finished its steep and rapid rate hiking. This perception of the markets quickly changed when the Fed spoke on the 2nd of November, only for those hopes to be reignited following the lower-than-expected inflation prints later this month.
At London & Capital, we believe that the real story is not the move down or the move up, the real theme is that of the underlying macroeconomic uncertainty. We believe that this heightened macroeconomic uncertainty is here with us for a while and the Fed’s cautious stance is therefore justified. This is quite a significant difference from the popular belief in an all-knowing and all-powerful Fed who can control the economy and the markets with ease. To understand what has changed, we need to go back to the 1960s where this belief in the Fed’s powers had its origins.
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