The market is coming to terms that it’s not just that the U.S. Fed is going to be aggressive in September after the latest shocking U.S. inflation figure, still running at 40-year highs, but that the central bank will have to hike rates higher, and keep them high for longer, than many seem to have anticipated.
In a new note to clients, Goldman Sachs chief markets economist Dominic Wilson and global markets strategist Vickie Chang crunched the numbers on what it would mean if Fed has to take a more aggressive path than the market is forecasting.
The results are not great. If the Fed has to hit the economy hard enough to get the unemployment rate up to 5%, the S&P 500 would have to fall 14% to below 3,400, the yield on the 5-year note would have to rise 91 basis points, and the trade-weighted dollar would rise 4%.
In the more severe scenario where the jobless rate would have to hit 6%, the S&P 500 would fall 27%, to below 2,900, the yield on the 5-year Treasury would climb 182 basis points, and the dollar would rise 8%.
That severe scenario implies a tightening of financial conditions comparable to the global financial crisis of 2008, and before that the recessions of the early 1980s.
“If only a severe recession—and a sharper Fed response to deliver it—will tame inflation, then it is likely that the downside to both equities and government bonds could still be substantial, even after the damage that we have already seen,” said the strategists.
MacDailyNews Take: As we wrote earlier this week when the latest U.S. inflation data sent the Dow plummeting 1,200 points: After drifting around aimlessly for far too long on the U.S.S. Transitory, the delusional Fed is laughably too little, too late.
Catching up will be difficult. But, hey, good luck on that soft landing. 🙄
In January, Interactive Brokers founder Thomas Peterffy said, “1% or 2% [in interest rate hikes] doesn’t mean anything. If they really wanted to stop inflation, they would have to raise rates to 4%, 5%, 6%.”
The Fed’s current target interest rate range is 2.25% to 2.50%.
‘Tis best to get a handle on inflation, if you know how, while you still can. – MacDailyNews, May 11, 2021
Stop the misguided crusade against domestic energy production and profligate federal spending and inflation will be stopped dead in its tracks. It’s not difficult. – MacDailyNews, May 11, 2022
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