Is the market overreacting? Some Fed members are arguing that there may not be a case to jack up rates so quickly and by more than a quarter-point at any given meeting.
The Fed’s playbook is written in pencil, not ink
This might be the time for investors to take a deep breath and remember that the Fed has a lot more data to look at before its March 16 meeting. It’s not going to make a decision on rates today based solely on January’s inflation reading.
“Even with elevated levels of inflation, we expect the Federal Reserve to tighten less than the market expects in 2022,” said Richard Saperstein, chief investment officer with Treasury Partners, in a report.
“We do not expect the Federal Reserve to announce rate hikes at every meeting, and such extreme tightening scenarios suggest that we’re currently witnessing peak Fed mania,” he added.
Others argue that the Fed will be reluctant to raise rates too far too fast because the market might have what is essentially a hissy fit. Stocks could plunge and bond yields would surge even higher.
The Fed also might be making a mistake if it raises rates too far too fast. The economy could slow dramatically, especially the highly interest-rate-sensitive housing market.
Memories of huge rate hikes 40 years ago still haunt experts
“If, because of Fed impatience, rates rise more rapidly over the next year, there is a considerable risk of a subsequent relapse as the Fed abandons its new-found and still shaky inflation-fighting resolve,” said David Kelly, chief global strategist with JPMorgan Funds, in a report this week.
Others note that the Fed has time on its side to monitor more data and figure out its inflation plan, and does not have to make any rash moves.
“At present, the Powell-led Fed is still talking about raising rates and reducing its bond purchases, but rate hikes are only theoretical,” said Steve Sosnick, chief strategist with Interactive Brokers, in a report this week.
That means investors are just going to have to keep their eyes on the data, just as Powell and his colleagues are. Everything else, even speeches from Fed members, is noise.