Dovish Rate Hike: Signals of US Recession Looming

Stephen Innes
Published: Mar 23, 2023, 07:56 UTC

The Fed and US administration may have lost the confidence game, as rapid rate hikes negatively impact the real economy and the balance of risk shifts to the downside.

The Week Ahead - FX Empire

Key Takeaways

  • FOMC meeting focuses on confidence
  • Rapid rate hikes impact the real economy
  • Main Street lenders face issues
  • Commercial real estate loans at risk
The FOMC meeting was less about the decision and more about the Fed’s ability to restore investor confidence in the banking sector. Still, markets sense the Fed might have broken something by delivering a dovish rate hike. And with the rates markets pricing in more cuts, it validates that view. Not only are investors losing confidence in the process, but they are probably more certain than ever that the US economy is headed for a recession.

After all, it is evident for anyone to see that the recent events confirmed that a rapid rate hiking cycle had an excessively negative impact on the real economy and, perhaps, the most crucial structural foundation of all, Main Street lenders.

Ultimately the Fed was in a no-win position with an impossible needle to thread. Had they paused, the market would have thought, what do they know we don’t and could have triggered a worse outcome. The good news is the Fed is unlikely to hike again any time soon; the bad news is the problems in Main Street lenders will most certainly impinge on the real economy.

Investors Face Crises and Risky Assets

When I went back to the drawing board at the start of this year, I had a hard time paying 18x for 0% expected earnings growth, and that was before the market plumbing sprung a leak and foundations cracked. So now, with rates markets back to signaling recession imminent, stocks should start to buckle as investors grow increasingly nervous that the regional banking story doesn’t subside, and we lurch from crisis to crisis.

And now that Pandora’s box has been opened, investors remain on high alert about other risky rate-sensitive assets lurking on banks’ balance sheets, specifically regarding commercial real estate loans, which could be the next domino to fall.

Risk Shifts Downward

We are amid the biggest confidence game in history, which the Fed and the US administration may have lost. However, I will note that we are only a fortnight into a new chapter, but the balance of risk appears to be shifting to the downside once again.

About the Author

Stephen Innescontributor

With more than 25 years of experience, Stephen Innes has  a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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