The stock market is always forward-looking and has been pricing in an increasing odd of an impending recession next year, as the Fed presses ahead with rate hikes to rein in a stubbornly high inflation.
Hence, every time a Fed official speaks or new Fed meeting minutes is released, the market will judge whether its earlier expectations have gotten ahead of themselves and will attempt to re-calibrate its expectations based on the latest news and data.
The Fed has largely been behind the curve last year, having previously misjudged the rising inflation as transitionary, as it mistook the surging inflation for temporary price increases that would subside when global supply chain disruptions from widespread lockdowns returned to normal when the pandemic eases.
That not only did not materialise, but has in fact worsened with the war eruption in Europe threatening global food supplies, while sanctions against Russia have led to escalating energy and crude oil prices.
As Fed’s decision-making is dependent on data that is at best a month old, the “latest” data may not necessarily reflect prevailing inflation and economic conditions. While the Fed looks at the rear-view mirror, stock prices react to real-time changes in market expectations, as daily news and insider information emerge.
By the time the Fed eventually declares victory over inflation in due course, the market may have already long rebounced from its bottom and is on its way to its next peak.
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