Federal Reserve Chairman Jerome Powell hiked interest rates last Wednesday and proposed six more hikes this year. It was an unexpectedly hawkish message, and yet stocks staged their best two-day rally since April 2020.
Why? Well, optimism about Ukraine had already boosted market sentiment. Stocks were technically oversold. Many strategists suggested that some uncertainties had been eliminated.
However, the future path remains uncertain. First, future inflation expectations are much more widely dispersed than usual among members of the Federal Open Market Committee, pointing to great uncertainty about when inflation will be brought under control.
Second, the Fed said unemployment would remain low at around 3.5 percent for the next few years despite the sharp rise in interest rates, but is that realistic?
“Wishful thinking,” said Peter Hooper of Deutsche Bank. “Fantasyland,” said Scott Minerd of Guggenheim Partners. “Imaginary,” said Grant Thornton’s Diane Swonk, who says the numbers “do not add up.”
Interest rates need to rise, but chasing inflation is tricky and potentially painful. “They are looking for an actual slowdown in the economy,” Swonk tweeted. “It may end up having to be frozen to get there.”
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