Here are three things the Fed did wrong and what’s still wrong


The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, DC on June 14, 2022.

Sarah Silbiger | Reuters

After years of being a beacon for financial markets, the Federal Reserve suddenly finds itself challenged as it tries to navigate the economy through bad inflation and away from the growing clouds of recession. darker.

Complaints around the Fed have a familiar tone, with economists, market strategists and business leaders weighing in on what they see as a series of policy mistakes.

Essentially, the complaints relate to three themes of past, present and future actions: that the Fed has not acted quickly enough to bring inflation under control, that it is not acting aggressively enough now even with a series of hikes rates, and that it should have better seen the current crisis coming.

“They should have known inflation was spreading and taking root,” said Quincy Krosby, chief equity strategist at LPL Financial. “Why didn’t you see this coming? It shouldn’t have come as a shock. I think it’s a concern. I don’t know if it’s as serious a concern as ‘the emperor doesn’t has no clothes “. But it’s the man in the street against the doctors.”

Consumers had actually expressed concerns about price increases long before the Fed started raising rates. The Fed, however, stuck to its “transitional” inflation scenario for months before finally enacting a meager quarter-point rate hike in March.

Then things suddenly picked up speed earlier this week, when rumor filtered that policymakers were getting more serious.

“It just doesn’t fit”

The path to Wednesday’s three-quarter point increase was peculiar, especially for a central bank that prides itself on clear communication.

After officials insisted for weeks that a 75 basis point hike was not on the table, a Wall Street Journal report on Monday afternoon, with little supply, said the officials had decided that more aggressive action was needed than the planned 50 basis point move. The report was followed by similar stories from CNBC and other outlets. (A basis point is one hundredth of 1 percentage point.)

Apparently, the move came on the heels of a consumer sentiment survey on Friday showing rising expectations for long-term inflation. This follows a report that the consumer price index in May gained 8.6% over the past year, beating Wall Street expectations.

Addressing the idea that the Fed should have been more forward-looking on inflation, Krosby said it was hard to believe the data points could have taken central bankers so far.

“You come up with something that just doesn’t fit, that they haven’t seen this before the blackout,” she said, referring to the run-up to Federal Open Market Committee meetings. when members do not have the right to address the public.

“You could applaud them for acting quickly, not waiting six weeks [until the next meeting]. But then, if it was so bad you couldn’t wait six weeks, how come you didn’t see it until Friday?” Krosby added. “That’s the market valuation at this stage.”

Fed Chairman Jerome Powell did a disservice at Wednesday’s press conference when he insisted there were “no signs of a broader slowdown than I can see in the economy”.

On Friday, an economic model from the New York Fed actually indicated high inflation of 3.8% in 2022 and negative GDP growth in 2022 and 2023, at minus-0.6% and minus-0.5% respectively. .

The market did not look kindly on Fed actions, with the Dow Jones Industrial Average losing 4.8% for the week to fall below 30,000 for the first time since January 2021 and wiping out all gains made since President Joe Biden took office.

Why the market moves in a particular way in a given week is usually anyone’s guess. But at least some of the damage appears to be stemming from impatience with the Fed.

The need to be bold

Although the 75 basis point move was the biggest single-meeting increase since 1994, investors and business leaders feel the approach still smacks of incrementalism.

After all, bond markets have already priced in hundreds of basis points of Fed tightening, with the 2-year yield rising about 2.4 percentage points to its highest level since 2007. The fed funds rate , on the other hand, is still only in a range between 1.5% and 1.75%, well behind even the six-month Treasury note.

So why not just think big?

“The Fed is going to have to raise rates a lot more than they are right now,” said Lewis Black, CEO of Almanty Industries, a global miner of tungsten, a heavy metal used in a multitude of products, based in Toronto. “They’re going to have to start getting into the high numbers to nip this in the bud, because if they don’t, if it sets in, really sets in, it’s going to be very problematic, especially for those who have the least.”

Black sees the impact of inflation firsthand, beyond what it will cost his business in capital.

He expects workers at his mines, based largely in Spain, Portugal and South Korea, to start demanding more money. Indeed, many of them have taken advantage of easily accessible mortgages in Europe and will now face higher housing costs as well as a sharp increase in the cost of daily living.

Looking back, Black thinks the Fed should have started to hike last summer. But he considers finger pointing unnecessary at this point.

“At the end of the day, we should stop looking for who is to blame. There was no choice. It was the best strategy they thought they had to deal with Covid,” he said. “They know what to do. I don’t think you can say with the amount of money in circulation that they can just say, ‘Let’s raise 75 basis points and see what happens.’ It won’t be enough, it won’t slow down, what you need now is to avoid the recession.

what happens now

Powell has repeatedly said he thinks the Fed can work its way through the minefield, notably joking in May that he thinks the economy can have a “soft or soft” landing. “.

But with GDP faltering on a second straight quarter of negative growth, the market has second thoughts, and some think the Fed should just acknowledge the painful road ahead.

“Since we’re already in a recession, the Fed might as well go bankrupt and abandon the soft landing. I think that’s what investors now expect in the near term,” said Mitchell Goldberg, chairman. from ClientFirst Strategy.

“We could argue that the Fed has gone too far. We could argue that too much money has been doled out. It is what it is, and now we have to fix it. We have to look ahead now,” he added. “The Fed is way behind the inflation curve. They need to move quickly and aggressively, and they are doing that.”

With the S&P 500 and Nasdaq in bear markets — down more than 20% from their recent highs — Goldberg said investors shouldn’t despair too much.

He said the current market run will come to an end and investors who keep a cool head and stick to their longer-term goals will recover.

“People just had this feeling of invincibility, that the Fed would come to the rescue,” Goldberg said. “Every new bear market and recession seems like the worst in history and things will never be good again. Then we come out of each with a new set of stock market winners and a new set of sector winners in the economy. It always happens.”


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