As the market grows more worried that rising inflation will prompt a more aggressive interest rate hiking campaign by the Federal Reserve, equity investors should remember that healthy economic growth has been a primary factor behind the rally lasting this long. So if upcoming data disappoints, and the Fed gets cold feet and pulls back on its tightening path, will markets breathe a sigh of relief? Don’t bet on it.
Minutes from the FOMC’s meeting in January showed that economic sentiment was improving, and there was some evidence that prices were starting to pick up. The Fed expects its inflation target of two per cent will be achieved, and doesn’t sound too concerned that the cost of living will become excessively high.
Yet the initial read was much more dovish, as the minutes included a lengthy discussion of potential disinflationary forces. So the market’s initial reaction was to buy equities and sell the U.S. dollar, but subsequent price action seems to suggest investors are reconsidering.