During Friday’s Jackson Hole speech, Fed Chairman Jerome Powell reiterated the Fed’s commitment to fighting record-high inflation, saying this is “no place to stop or pause” rate hikes. His comments now have many experts worried about the coming months. BlackRock, the world’s largest asset manager, is worried that the Fed could overdo its policy tightening. Chief Investment Officer Rick Rieder said, “it’s absolutely imperative that the Fed get the currently high rate of inflation under control. We are concerned about the potential for the central bank to overdo the tightening and undo much of the progress that has been made in recovering from the pandemic shock.” Daniel Lacalle, an economist and fund manager, fears that the Fed may be too complacent about the strength of the economy and too optimistic about liquidity in markets.

ZeroHedge/Daniel Lacalle
Powell’s Double Challenge: Slowing Economy And Vanishing Liquidity

The hawkish tone of the Fed’s chairman Jerome Powell on Friday 26th was unequivocal. His most important sentence, in my view, was the following: “With inflation running far above 2% and the labour market extremely tight, estimates of longer-run neutral are not a place to stop or pause.”

What does this mean? The Fed will do what it takes to cut inflation if the labor market remains strong. These strong messages sent ripple effects to markets. Stocks and risky assets fell in unison and the US dollar relative strength created another widespread depreciation of weaker currencies.

The Fed knows that inflation is fundamentally a monetary phenomenon and that they must correct the mistake made in 2020 by increasing dramatically money supply and sending rates to even lower territory.

Inflation is the destruction of the purchasing power of a currency. One or two prices may rise due to an exogenous factor, but all prices cannot go up at the same time if the amount of money in the economy is unchanged. Other prices would fall with the same amount of currency.

However, the Federal reserve may be too complacent about the strength of the economy and dangerously optimistic about liquidity in markets.

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Market Insider/Carla Mozée
The Fed should go on vacation after this year’s rate hikes to avoid the risk of overdoing its tightening efforts, BlackRock says

BlackRock, the world’s largest asset manager, said the Federal Reserve’s rate hikes in 2022 to combat inflation should be enough to put policy makers in a wait-and-see position that’s needed to reduce the risk of them overtightening and damaging the world’s largest economy.

That view was laid out in a Friday note by Rick Rieder, chief investment officer of global fixed income at BlackRock, which manages $2.4 trillion in fixe- income assets.

“[Fed Chair Jerome Powell’s comments] did little to dissuade our belief that that the Federal Open Market Committee can raise policy rates another 75 basis points at the September 21 meeting,” Rieder said after Powell’s speech at the Fed’s Jackson Hole symposium. Markets were pricing in about 125 basis points of rate hikes by the end of 2022, the investment executive said.

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Kitco News/Cornelius Christian
The Fed has never hiked rates during a recession, expect stock markets to fall another 50% – Todd ‘Bubba’ Horwitz

Investors are looking for new guidance in Federal Reserve Chairman Jerome Powell’s Jackson Hole, Wyoming, speech Friday, but he could instead deliver the same inflation fighting message, just with a much tougher edge.

Powell is expected to emphasize that the central bank will use all the fire power it needs in the form of interest rate hikes to snuff out inflation. He is also likely to point out that after the Fed finishes raising rates, it will probably hold them there, contrary to market expectations that it will actually start to cut interest rates next year.

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