OPINION: By succumbing to market expectations of fast rate hikes, the Federal Reserve will create the very recession that the bear market in equities already anticipates, investment banker Joachim Klement writes.
In the history of the Federal Reserve, the most revered chairmen are William McChesney Martin, Paul Volcker and Alan Greenspan. All gained their reputation by decisive monetary policy action at times when stock and bond markets did not want or expect them to act.
The Fed just raised interest rates by 0.75 percentage points and that is being compared with the 1994 rate hike of the same magnitude under Alan Greenspan. But in 1994, the Fed hiked interest rates long before investors expected rate hikes or before inflation really became a problem. The Fed not only was “ahead of the curve” but it dictated to the market what interest rates were going to be.
In February, Russia invaded Ukraine – a supply shock similar to the oil crisis of 1973 and the Iraqi invasion of Kuwait in 1990. In 1973 the Fed panicked and started to hike interest. Today we know this was one of the biggest policy mistakes in the history of the Fed and the start of the stagflation of the 1970s.
The charitable interpretation of the Fed’s actions is that its economists were just catching up with what the bond market already knew. In my view, this charitable interpretation misses the point. The Fed has been bullied by the market into more and more aggressive rate hikes in light of a large supply shock.
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