Risk markets think that the Fed is wrong

Source: www.tradingview.com

Last week's dot plots suggest rates will move higher, with the terminal rate adjusted upwards from 4.6% to 5.10%. The Fed chair's tone during the media conference was hawkish. Risk markets were less than impressed. They sold off heavily for the rest of the week. The market thinks that Fed policy is too aggressive.

During stagflation periods, it is the PPI which leads the CPI. During the 1970s and early 1980s, amid the first and second oil crises, the apex of the PPI (blue dashed verticals) led to the almost immediate decline in core CPI (red arrows).

For the current cycle, the PPI hit its peak in March (green dashed vertical), with core CPI peaking soon after. Given the leading nature of PPI, it is likely to exert further influence on the core CPI (green arrow). There is a lag in the transmission mechanism of raised rates. This heightens the risk that the continued hiking of rates will affect negatively on activity, plunging the economy into a harder recession than necessary. The market's intial response suggest that the central bank is going too far.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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