“We are clearly in an 8th inning of a tightening cycle, and we have the ninth inning coming up at the end of June.”
The markets, which had already bounced off of their May lows, gathered themselves together over the next few days, and then made a new leg up. Many people credited that move to Fisher. It only was halted by the late August hurricanes in the Gulf, and the destruction of New Orleans. During the first week of this year, we again had “lift off,” similarly premised on the idea that the Fed tightening cycle was just about over.
This leads me to a question:
How much of the rallies during the past 12 months have been based, at least in part, upon the false premise that the Fed is nearly through tightening?
Long time readers of mine know that I believe markets rarely move in a “this happened, so markets did that” basis. The complex choreography of capital markets are far more intricate than many folks realize, hardly as efficient as most academics believe, and may be far more attuned to the rules of chaos than those of pure randomness.
Is the Fed “just about done?” Given the recent jawboning from various Fed officials, I believe that is a premature declaration. Last week, Chicago Federal Reserve Bank President Moskow suggested that rates are “historically low,” that inflation was “creeping into the core” CPI rate. Further, he spooked the markets when he suggested that rates may need to “rise further beyond neutral” to kill inflation.
The consensus is evolving amongst various Fed officials that erring on the side of over-tightening is much preferred to letting inflation accelerate. New Fed head Bernanke may even “brush aside lawmakers’ calls for a pause” and “vow vigilance against inflation.”
Indeed, in a hardly noticed announcement, the FOMC changed the previously planned upcoming FOMC one day meeting into a two day affair. I hardly think the extra time is to welcome helicopter Ben to his new gig. Rather, it is more likely to discuss the increasing signs of inflation of the commodity, wage, and fiscal flavors. (Note, however, that I do not believe there is wage inflation).
It is my suspicion that more than a little of the Bullish optimism we have seen over the past 6 months has been incorrectly attributed to the Fed tightening cycle ending. Even more ironically, this regardless of the data showing that markets tend to slide when tightening cycles end.
To borrow from Dallas Fed President Richard Fisher’s analogy:
it looks like we are about to go into extra innings against inflation – again.