I'm gonna expand some thoughts from this post earlier here.
At this stage, there is only one focus when it comes to the Fed and that is inflation. It is the hot topic on everyone's lips but what exactly can the Fed really do at the moment?
As inflation in the US (and across the globe) soars, everyone is pushing the Fed to do something. The fear is that out-of-control inflation will ruin the economy, thus Powell & co. have to step in.
But as mentioned time and time again, central banks are just not equipped to deal with the latest inflation conundrum. The Fed can hike 50 bps or 100 bps today for all I care but it isn't going to fix anything.
Monetary policy cannot fix supply chains. Monetary policy cannot fix lockdowns in China. Monetary policy cannot resolve Russia-Ukraine tensions and surging energy prices.
Those are the key issues when it comes to the inflation conundrum and it isn't anything the Fed can do to help.
There are a couple of thought passages in the market at the moment when it comes to the above situation so let's try and take a look at them.
The first being that the Fed is making a policy error by moving too slow to hike rates as inflation is well above its 2% target.
Well, let's be honest. Near 8% inflation is pretty much saying that they are already well behind the curve. It's not exactly a risk if it is already happening. But in their defense, the Fed knows very well that by acting too quickly, they aren't going to be resolving anything as noted above.
So, what exactly are they aiming for?
That brings us to the second thought passage i.e. the Fed risks a policy error by tightening too much in order to bring inflation back down to 2%.
Here's the catch though. You can't exactly quantify or analyse what exactly is "too little", "just right", or "too much" when monetary policy isn't going to work as intended to bring down inflation in the first place.
The Fed is pretty much banking on hope, so as to not tighten too quickly and allow the economy to breathe while the factors that are causing high inflation right now eases in the coming months/quarters.
Sure, they may be forced to send a message to calm markets down and that could be a 50 bps rate hike in May. But will it change anything on the inflation front? Not a chance.
The issue here is that the market seems to be cornered into thinking that it is either the Fed hike rates aggressively this year (to try and do something about inflation) or risk a recession.
However, I really fear that we are not heading into a choice in that matter but rather we will get tighter policy and a recession. That just doesn't add up now, does it?
The tantrum thrown by the market is that the Fed has to focus on its inflation goal so as to ensure growth stability. But if their only choice is to tighten policy in favour of the former, they're also essentially abandoning the latter.
Honestly, I can't tell central banks what the right answer is because perhaps there is no right answer at the moment. There are consumer politics involved in the decision-making too and it is tough to satisfy every party.
two four-and-a-half cents anyway. Get it? ;)