Beyond neutral

George Kessarios
Chief Economist & Fund Manager

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The Fed raised rates by the expected 75 basis points, the second such unusual large hike, and as usual markets rallied once again. The president of the Fed said that there is a chance that the Fed might raise rates by another 75 basis points, but this dependent on the incoming data.

Bonds rallied with the US 10-year yield around 2.8%, which could mean the bond market does not think inflation is going any higher, that the Fed will back off soon, or perhaps nothing at all.

Jerome Powell said he thinks monetary policy is at neutral but thinks that monetary conditions warrant going into restrictive mode. He also repeated several times that he does not think the US is in a recession at the moment, contrary to most economist and most data sets that point to the contrary.

He also ended the need to conduct policy with forward guidance. As such it is probably fair to say that we cannot rely on anything the Fed says anymore, as policy will be conducted based on the incoming data.

In the meantime, the Fed’s balance sheet is shrinking, although at a small pace. It remains to be seen if the Fed can manage to shrink its balance sheet by 2-3 trillion before something breaks. And that something might be a higher dollar, and a complete collapse of many EM economies.

Meta (Facebook) which rallied in Wednesday’s session gave almost everything back in after hours. As expected by most analysts, the company missed on all fronts. What is important to note in Meta’s earnings, is that Q3 revenue guidance between the range of $26-$28.5 billion is much lower than the $30,32 billion expected by the market. This coupled with the first Y/Y revenue shortfall as a public company, might mean we are at a tipping point insofar as the online add business, and this might have negative implications for the entire high-tech space.

Coupled that with the fact that the Fed wants to go “beyond neutral” might have further negative implications not only for the high-tech space, but also for markets as a whole.

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