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Distorted views

Jul 28, 2022

“Objects in the rear view mirror are closer than they appear” is the safety warning that is required to be engraved on passenger side mirrors of US cars. The same warning goes to the Fed as it increased rates by 75 bps yesterday. Markets rallied on a statement by Powell that the pace of Fed rate increases will slow at some point. We find it difficult to share the market optimism as we read the following Fed statement : “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data.”  While relying on data is fine, it comes with 2 caveats: 1/ the data lags behind the economic reality by months and 2/ the rate increases take months to feed through the economy. These time lags provide a distorted view on the economic reality and could lead to policy errors by the central bankers heavily relying on them. For the Fed it must feel like driving forward while only looking into the rear mirrors.

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