We're at the point where Fed policy is pushing up against market sentiment. As history shows, the Fed always wins. Trying to fight against a tide of money flows going out is a losing proposition. But, if you are keen enough to see when money flows are moving, you can take advantage and at the very least protect your portfolio for imminent disaster.
So far in 2022 the markets have turned sour. Sentiment is poor, volume levels are high when the market is selling, indicators are bearish and the price action is awful. We're in a bearish trend right now, no better way to explain it. And this was pushed onto the markets by a change in Fed sentiment from dovish to hawkish.
What does that mean exactly? The Fed is acutely aware of the dangers inflation brings to the economy, the dollar and the cost of living. While they may allow some inflation to come into the economy they clearly did not plan for the high levels we are seeing now. Since the pandemic started, Fed policy has been overly generous, accommodative with several doses of monetary stimulus.
But eventually that is going to create inflation, too much money chasing too few goods. With the economy starting to heal from a massive shock (2020 pandemic), there is no justification to continue with bond purchases and a zero interest rate policy.
The criticism of the Fed today is the same as before: They are acting too late to solve the problem. I disagree. The Fed is very much in control of the game, they have gone as far as possible and recognize it. When it's time to shut down the money supply to the economy as they are doing now, there will be collateral damage, but a small wound (say, to the stock market uber bulls) will save us from inflicting severe damage.
Fed funds futures show a 6% chance of a rate hike at this week's meeting, so unlikely but still a live topic. March's meeting prices in about 93% probability of a rate hike. The market is adjusting to the new environment and we have seen it this past week. More to come.
