In past videos we talked about financial markets potentially entering crazyville as we get closer to and throughout the second half of 2021. Well, the Federal Reserve drove us right into crazyville last week.
In short, in the game of chicken against inflation, the Federal Reserve blinked. Up until this past Wednesday, the Fed had been clear in its messaging. It was employment over inflation and actual inflation over forecasted inflation. It was inflation being transitory and the need for patience.
Well in the span of one meeting that all changed. The Fed is worried about forecasted inflation and now sees two hikes in 2023 when just a few weeks back it was zero. Not only that, but the St. Louis Fed President then stated on Friday that it could be late 2022 for that first hike. Clearly employment is no longer the main focus of the Fed, who are now a lot more worried about upside risks to inflation. The markets are now doubting that the Fed will allow inflation and longer-term growth to run hot. This is part of the reason why the market went from inflation to deflation as the Fed used forward guidance to hit the inflation trade.
For the week ahead, let’s see what leads the market. Post-Fed meeting it was the U.S. dollar and longer duration bonds. If this continues this week, expect another tough week for stocks and the reflation theme.
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