A few weeks ago (May 4), we had our best day in two years because Powell said the Fed wasn't actively considering hikes bigger than half a point. The next day, we had our worst loss of the year because investors realized the news wasn't really that good. At a minimum, it was an overreaction. I believe we'll see something similar over the coming days.
The Fed is doing the right thing here. They need to take inflation seriously, and they need to be willing to possibly even move to a restrictive rate. I am not criticizing the message. But the market got the interpretation wrong. If the Fed has to hike to a restrictive rate, or even if they have to hike more than has been presumed, we will have a more profound recession. This is indisputable.
The market is cheering the Fed doing what it needs to do, but the harsh reality is that correct action will result in much lower corporate earnings, layoffs and generally slower economic growth. Stocks will be worth less in this environment.
The Fed wouldn't be discussing the possibility of more hikes or a higher, possibly even restrictive, terminal rate if they didn't feel inflation might be harder to tame than many believe. I'm personally glad the Fed is willing to do what needs to be done, but this isn't good news for stocks.
This is sort of like going to a doctor for a skinned up knee and him telling you that he's willing to amputate if there's significant infection that spreads. Great, doc, glad you're willing to do what's necessary, but relative to my expectations before coming to the hospital, this is suddenly pretty scary.
I don't make daily market predictions, but I think we'll see this rally fade. Whether it's tomorrow or over a week, who knows.
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