Federal Reserve chief Jerome Powell hiked interest rates last Wednesday and suggested six more increases are coming this year. It was an unexpectedly hawkish message, and yet stocks enjoyed their best two-day rally since April 2020.
Why? Well, optimism over Ukraine had already improved the market mood. Stocks were technically oversold. Many strategists suggested some uncertainty had been lifted.
Still, the path ahead remains uncertain. Firstly, future inflation expectations among members of the Federal Open Market Committee are much more widely dispersed than usual, suggesting much uncertainty as to when inflation will be controlled.
Secondly, the Fed said unemployment would remain low at about 3.5 per cent over the next few years, despite the big increase in rates, but is this realistic?
"Wishful thinking," said Deutsche Bank's Peter Hooper. "Fantasyland," said Guggenheim Partners' Scott Minerd. "Fanciful," said Grant Thornton's Diane Swonk, who says the numbers "don't add up".
Rates must rise, but chasing inflation is a tricky and potentially painful business. “They are looking for an actual cooling of the economy,” tweeted Swonk. “May end up having to freeze it to get there.”
