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Financial markets rocketed higher yesterday after Federal Reserve Chair Jerome Powell said the central bank might scale back the pace of its interest rate hikes as early as December. Bullish hopes fixated on the prospect of a 50 bps hike on December 14 rather than a fifth consecutive 75 bps. This is the surreality of the most aggressive monetary tightening cycle in history; a 50 bps hike is considered the new dovish.

With recession warnings blaring across the globe, it’s rational to think that the US Fed will relent from its late and great hiking cycle when unemployment (a lagging indicator) starts to spike. They have a dual mandate, after all.

Of course, Powell also said, 

“It is likely that restoring price stability will require holding (interest rates) at a restrictive level for some time… history cautions strongly against prematurely loosening policy…Despite some promising developments, we have a long way to go in restoring price stability.”

Those comments were conveniently ignored in the month-end window dressing and FOMO panic buying. Of course, these are the same Fed officials who said in 2020 that they expected to leave interest rates near zero through at least 2023. But I digress.

The larger picture is this:

• • Body blows to the highly levered are already in motion because interest rate changes move at a lag of many months as new financing and refinancing needs arise.
  • The tightening since March 2022 is just beginning to impact and will continue through 2023, even if central banks were to start loosening conditions again tomorrow.
  • They plan to keep hiking rates through at least February 2023.
  • At the same time, they are reducing liquidity (QT) by $95 billion per month–the estimated equivalent of a further 20 bsp of tightening monthly.
  • It is typical for central banks to pause for months between the last rate hike and the first cut because it is understood that monetary policy moves at a multi-month lag.
  • The worst of stock market losses have historically materialized AFTER the Fed has been easing financial conditions again for many months. Not before.

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