By Michael Every of Rabobank
Fed day - and what a Fed day! In the space of a few trading sessions the market has swung from expectations of a 50bps hike, eyebrow-raising a few weeks ago, to 75bps, a weapon last wheeled out in 1994, with some whispers of 100bps.
75bps was actually one of the smaller Volcker hikes, the largest being a staggering 525bps in March 1980. In short, the last time US inflation got out of control on the supply and demand side, it dwarfed present volatility.
In March 1980, Volcker hiked 500bps
— zerohedge (@zerohedge) June 14, 2022
In April 1980, Volcker cut 850bps
In May 1981, Volcker hiked 400bps
In June 1981, Volcker cut 450bps https://t.co/lsAPrEm5fi
True, the US is not seeing a demand boom now even if the rich are in fine fettle, and some see a post-Covid carpe diem, borrow-and-live-now, pay-later attitudes. Yet supply is constrained, and higher oil output is not helped by suggestions of a 21% windfall tax on energy companies; or lower tariffs on Chinese bicycles, which President Biden apparently favours. Our Philip Marey also sees a wage-price spiral in place that will continue if policy is not tightened.
The irony is that if the Fed ‘only’ goes 50bps, we might get a relief rally. Yet what if we get 75bps and indications of more to come via the dot-plot? Is that already fully priced in?
As a run-up to today, markets tried to force an equity and bond bounce: both largely failed, as the S&P closed lower, and...