Making money: what the experts think
● One-two punch
Last Friday was “horrific” for US stock markets, said Robert Armstrong in the Financial Times – major indices fell 2.5%, or worse. The reason wasn’t hard to find. The fear is that an “increasingly hawkish Federal Reserve” will slam on the brakes so hard in its quest to tame inflation that it will “both slow the economy and pull liquidity out of the financial system” – hitting stocks and other risk assets “with a one-two punch”. Until last week, it was just about possible to hope that the Fed’s tightening programme would consist of a series of “gentle rate rises”. But, according to CME’s FedWatch tool, there is now “a 75% probability” that interest rates “will cross the 3% threshold by year end”. If the market was previously “sleeping”, it is certainly “wide awake now”.
● Global ramifications
With prices, in March, running at 8.5% higher than a year earlier, nearly a fifth of Americans reckon that inflation is now “the country’s most important problem”, said The Economist. The good news is that it “may have peaked at last”. But getting anywhere close to the Fed’s 2% target will force some “agonising choices” on the central bank’s chairman Jay Powell. The omens aren’t great. “In the past 60 years, the Fed has on only three occasions managed significantly to slow America’s economy without causing a downturn. It has never done so having let inflation rise as high as it is today.” The threat of US contraction therefore hangs over the global economy as part of “a trio of risks” – along with Europe’s energy security and China’s struggle to suppress Covid.
● No relief
Expectations of tighter policy have sent the US dollar to “its highest level in more than two years”, said the FT. Elsewhere, currencies have been tumbling – the pound, for instance, has sunk to its lowest level since 2020 “as storm clouds gather” over the British economy. “Investors are piling into the dollar… and downgrading growth estimates for the rest of the global economy,” said Karl Schamotta of Corpay. We saw this writ large in Europe this week, said CNBC. Even the defeat of the hardright Marine Le Pen in the French presidential election failed to produce the predicted relief rally.