Short and concise analysis on concepts or recent events in the financial markets from the ASG Capital Team.
Hello, everybody. The focus today is on the FOMC conference of December 2022. The main take away from this meeting was that interest rates would stay higher for longer.
What this really means? No one really knows. It could range from Fed funds rates being brought to 5% for six months rather than three, or maybe higher for even longer.
The vagaries of these comments come from the Federal Reserve not being sure where the economy will be in six or nine months time. After all, its own predictive ability based on questionable models has been shown to be off target on numerous occasions.
Interesting to note once again, no mention was made as to the fuel rod of inflation, which is credit creation. No straitjacket was ever placed on the banking sector to limit lending, for example. It so happens the rising economic uncertainty and the commercial banking sectors limited appetite for risk have brought a natural reduction in their lending books recently. This is without it being imposed on them by their own banking authority.
It would seem the FOMC conference of December 2022 was just another communication exercise. The Federal Reserve is seeking to show it is doing something to address inflation while trying to restore the credibility lost in its transitory inflation projection. How better to do so than been bringing the official interest rates to a level that it is today?
For their part, fixed income markets are telling us a different story. They are pointing to the end of this restrictive monetary policy. They expect the effects of past interest rate increases will start to show in slowing economic activity and reduced inflation in the coming months.
As we head into 2023, there seems already to be a clash of viewpoints. On the one hand, the Federal Reserve is arguing the inflationary glass to be half full, requiring another dose of constraint. On the other side of the argument, markets see it half empty, suggesting enough has been done already.
Economic data is already confirming what thousands of financiers around the world are seeing, but seems to be missed by the Federal Reserve. This would not be the first time capital markets and US monetary authorities are not exactly on the same page.
This podcast is for information only. It should not be considered as investment advice. We would recommend seeking professional investment advice to benefit from monetary policy changes.