It is only right and natural that a war as potentially devastating as Russia’s invasion of Ukraine would dominate the market as long as it rages on, but I can’t escape the feeling that while focusing on that, the market is not paying much attention to something that is, economically speaking, far more impactful. Stock index futures are indicating a higher opening this morning on positive comments from Vladimir Putin, despite that fact that yesterday’s Consumer Price Index (CPI) data showed inflation raging and the Fed, far from reacting decisively to that, is still adding fuel to the fire.
Of course, it is reassuring in some ways to hear from Putin that there have been some “positive shifts” in talks between Russia and Ukraine but, honestly, should we be paying much attention to what he says at this point, even (or especially) if it is what we want to hear? He has been lying to his own people and to anyone who will listen since the invasion began and has shown himself many times to be a master of misinformation and manipulation. Not even his spoken words are worth the paper they are written on, and yet billions of dollars are being traded based on him saying something that we are desperate to hear, something that makes him look at least somewhat reasonable in the eyes of the world.
Meanwhile, yesterday’s CPI data showed a 0.8% jump in prices month to month, which translates to a 7.9% annual inflation rate, the highest in forty years. There isn’t much solace to be found in the Fed’s preferred measure, core inflation, either. That number, which strips out often volatile food and energy prices, rose by more than three times the Fed’s targeted 2% rate, coming in at an annualized rate of 6.4%. In yet more bad news, pay isn’t keeping up. Wages went up, but by less than prices, resulting in a decline of 0.8% in real wages over the month, 2.6% over the last year.
Nothing good there, however you look at it. And yet, dig into the news today and you will find reports heralding the fact that today is a big day for the Fed. It will mark the last time they make asset purchases in the biggest round of quantitative easing (QE) in their history. So, QE is ending now in response to core inflation numbers that registered above the Fed’s target rate in April of last year and were more than double that target, at 4.5%, by June.
Actually, it is even more ridiculous than that. What is ending is balance sheet expansion by the Fed. They will continue to buy bonds and packaged mortgages for an indefinite period to maintain their total holdings as the current ones mature. I know that they are scared of creating a shock to the financial system by suddenly reversing such a long-standing policy that has offered so much free money to banks and financial institutions for so long, but even so, it's a questionable move.
The over-simplification of complex, nuanced issues is a plague on our society right now, so I hesitate to take a simplistic view of inflation and the Fed’s response but, as Freud famously said, sometimes a cigar is just a cigar. Inflation has been way over target for just about a year and yet it is only now that Jay Powell and the rest see fit to react. As a result, they are still enacting stimulative monetary policy, with inflation at 7.9% and unemployment registering a well below average 3.8% last month.
The end of the Fed’s balance sheet expansion today is a stark reminder of how much drastic change to monetary policy must now be enacted, and of how likely it is that the Fed have left it so long to make this change that they might be behind the curve in the other direction now too. There is a good chance they will still be tightening when things start to slow drastically. Traders are reacting to encouraging words from Vladimir Putin, and buying stocks. They may well be focused on the wrong news and if so, the market volatility is far from over.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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