Fed and ECB, crossroads on higher rates: how markets react to moves by central banks

Markets surprised by Powell’s words

Ten days ago, obsessed with the pivot, or the proposed rotation of monetary policy in the imaginative language of Wall Street, traders reacted with great surprise to the Fed chairman’s speech in Jackson Hole by dropping the stock market by 3.4%. Such a “hawkish” tone and such determination to continue the rate hike until inflation starts towards the 2% target, they really weren’t expecting it. In reality, the surprise is not in the words of Jerome Powell, but in the obstinacy with which the market – as much as 90% of operators, according to one estimate, including strategists from the prestigious Goldman Sachs – continued to cultivate the idea of ​​a fall in interest rates by the end of the year or at most in the first months of 2023: while for weeks all the members of the Fed have warned that this would not be the case. Yet, lucidly, Bank of America economists repeated that at “Jackson Hole, the Fed (would) firmly reaffirm its determination to pursue price stability, even at the risk of causing a recession”, that there would be no pivot and that, therefore, the shares would have suffered a severe blow. Not surprisingly, Powell’s words also appeared to the analysts of Aberdeen and to the managers of Algebris. Exceptions, it will be said. Maybe on the stock market.

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