Rally Could Encourage More False Fed Actions

  • The rise in equities since the Fed’s meeting in November will support the Fed’s hawkish stance, according to the Quill Intelligence CEO.
  • The focus will be on what Powell showed at his press conference this week – the “written dove” or hawk.
  • The S&P 500 is up nearly 2% since the November FOMC meeting.

The rise in equities since the Fed’s meeting last month will bolster Federal Reserve Jerome Powell’s determination to tighten monetary policy next year, according to Danielle DiMartino-Booth, a former adviser to the central bank’s Dallas area.

The Federal Open Market Committee is expected this week to raise the benchmark interest rate for the seventh time in 2022, as part of its mission to bring inflation back to its 2% target. The S&P 500 has gained 2% since the 75 basis point rate hike on Nov.

“The rebound in stocks in recent months means easing financial conditions in the eyes of Federal Reserve officials,” Danielle DiMartino Booth, CEO and chief strategist at research firm Quill Intelligence, said in a note Monday.

“Fed officials have made clear that they aim to suppress animal spirits and eliminate the excesses of their own policies that have been too accommodating for too long. The ‘risk’ on trade since the November FOMC meeting will strengthen Powell’s determination to put more pressure on 2023. “Monetary tightening,” said DiMartino Booth, a former adviser to Richard Fisher, who served as chairman of the Dallas Fed.

Stocks, which rose after Powell last month, signaled that policymakers will reduce interest rate hikes as of December’s decision as this year’s streak continues in the economy. Investors are expecting a 50 basis point rate hike.

“The main focus in Wednesday’s FOMC developments won’t necessarily be the size of the rate hike itself, but as Jerome Powell demonstrated on the podium at his press conference – a kind, gentle and scripted pigeon or hawk ready to return,” said DiMartino Booth at the final FOMC press conference in early November. “We are not afraid to shake up the markets, as it is,” he said.

A half-point rate increase is “still a pretty big increase,” he said. “The effects of the historically dramatic campaign are being felt in interest rate sensitive sectors such as housing and automobiles, so the pace of tightening, which is likely to begin on Wednesday, needs to be slowed.”

DiMartino Booth said that alongside several rate hikes in the first quarter of 2023, he will continue to draw liquidity from the system by allowing the Fed to lower the balance sheet of Treasuries.

“The impact of Quantitative Tightening has already manifested itself in the contraction of money supply growth, tighter lending standards, and the freezing of asset-backed markets that finance commercial real estate and auto loans,” he wrote.

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