With recent coverage on Bloomberg (paywalled, therefore free archive link: https://archive.ph/fmLjF#selection-4293.133-4293.201 ) and many heated discussions online, one has to wonder if the market is overenthusiastic at this point, almost deliberately misinterpreting the signals provided.
Powell will still go strong with future rate hikes, his words have not been dovish, but some parts of the market seem to read a more dovish stance into it.
Background: The current inflation is rooted in a multitude of factors, maybe more by the sheer number than in prior inflationary periods.
The distortions caused by Covid19 such as homestay, QE, supply chain disruptions, overheating property market, procurement pattern shifts, labour and worker scarcity, stagnant or even decreasing investments in certain commodities (mining, development, exploration), shifted consumption patterns and further micro chain effects in various industry/business categories seem to last longer than anticipated – inflation is not transitionary.
Climate change and Russia's war with Ukraine are additional disruption factors that make a recovery back to low inflation levels more challenging.
Because these inflation drivers have become more intrinsic the Fed won't have any other option than causing a recession. The longer the current (uncertainty) period takes, the more painful the outcome will be.
The fairy tale of a soft landing might be just a good tool for the purpose of providing hope, because in reality a soft landing won't fix the underlying problems, a hard landing will possibly do a better job.
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