Wall Street is bracing itself for a potential sell-off, according to Michael Wilson, equity strategist at Morgan Stanley. Wilson believes that a hawkish message from Federal Reserve Chair Jerome Powell at the Federal Open Market Committee meeting could trigger a negative surprise for equities, prompting a sell-off. Despite speculation that the central bank will cut the federal funds rate to counteract the recent banking industry turmoil in the US, several analysts warn that investors expecting cuts are likely to be disappointed. The Fed’s commitment to holding rates high and not cutting this year is unwavering due to persistent inflation, they say.
Claudia Sahm, an economist and macroeconomic expert, supported this idea, saying Powell had made it clear the Fed would not cut rates this year and that people should “believe him.” Sahm believes that the Fed’s stance will be strict because officials want to avoid the mistakes of past Fed chairs and revere former chair Paul Volcker’s approach to monetary policy. They also remember their own experiences with high inflation in the 1970s and early 1980s.
While Paul Volcker’s monetary policy and the emergence of new oil sources in the early 1980s helped control inflation, the underlying problems persist, according to Wall Street Silver’s Twitter account. The Fed can’t solve this problem – as soon as rates come down, the same underlying problems exist, and inflation roars back. Sahm clarified that she was merely explaining how history is viewed inside the Fed, not what’s true.
Meanwhile, investors are concerned about the market’s reliance on tech stocks with large valuations, which could exacerbate the impact of any negative news. Wilson warns that investors banking on the Fed cutting rates this year are likely to be frustrated with the outcome as equities are priced for an optimistic policy outcome (rate cuts in ’23 without the growth downside).
Overall, it seems that the Federal Reserve is committed to holding rates high to control inflation, even if it means disappointing investors who are expecting cuts. While the underlying problems with inflation persist, there is no easy solution, and careful management of monetary policy will be vital to keep markets stable. Investors will have to brace themselves for potential turbulence in the equity markets in the coming days and weeks.
