The market started pricing in an extremely hawkish Fed after comments by Fed Chair Powell last Thursday in a panel discussion with ECB President Christine Lagarde. The NASDAQ was down big both Thursday and Friday and commodity and precious metals stocks got hit hard. The Futures are currently (4:15am EST) signaling a continuation of these moves Monday morning. But while the Fed is essentially a lock to hike 50 basis points on Wednesday May 4, I’m still not convinced that Powell is Volcker.
The real test will come when the stock market starts to crack. Will Powell have the backbone to go through with a series of big rate hikes at the cost of popping the asset bubble and the inevitable recession to follow? Or will he blink?
The right thing for him to do for the long term health of the economy would be to crush inflation – regardless of its short term effects on the stock market and the economy. That’s because if he lets inflation get out of the bag – which it is on the verge of – it will be 10 times more difficult to reign it back in. The time to act is now – and decisively.
But doing so will entail dealing with tremendous criticism. People will blame him for causing the stock market to crash and the economy to fall into recession. What they would fail to understand is that he was doing this for the long term health of the economy. Short term pain, long term gain. Volcker could take the pressure and stay the course. Can Powell?
The answer to that question is the most important thing for investors to focus on in the weeks and months to come.