E The Fed Will Take The Stock Market Down

There is a warning from Tim Duy that the Fed views inflation as being in the danger zone. This does not mean the Fed is right. It does not mean the Fed is wrong. But it means the Fed will likely take down the stock market.

The capitalist fear of workers making too much money is now coupled with the Fed's understanding that bonds are collateral, in such massive amounts that they simply cannot tolerate large jumps in long interest rates.

By hitting the short rates hard, the Fed will give confidence to those in the bond market that long bonds are still worth buying. If there is an inversion, oh well.

This is what came from the Fed itself, even though it is not reaching its 2% inflation target:

 

In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis.

It is pretty clear that 2 percent is a ceiling, not a target. Overheating is new language for the Fed. Stock market investors most likely should take those words seriously. The Fed is heating up to the threat of overheating.

As Tim Duy says, the Fed, through Lael Brainard, views headwinds to a heated economy as now becoming tailwinds. 

Professor Duy warns of an increase from three hikes to more hikes and responded to Brainard's words this way:

Yeah, that’s not a coincidence. That’s kind of hitting us over the heads to prepare ourselves for changes in the forecasts and the statement with the next FOMC meeting. First thought is that we will see the “overheating” language appear in the statement, which is to be interpreted as a warning that while they intended to maintain gradual rate hikes, it is more likely that incoming data will trigger an increase rather than decrease the pace of hikes.

Duy says fundamental changes are coming. Hikes will be fast or blunt body blows. Or both. Duy is saying the gradualism is over. 

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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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