, which Garthwaite sees as a small demand shock and a major supply shock, which is still playing out around the world., which he sees as a potential demand shock, albeit one difficult to quantify at this point.Garthwaite says there are a number of possible explanations, including a bottoming out of sentiment, a sense that at least this year’s rate hikes are priced in, and the fact real rates have probably gone down as inflation from the war in Ukraine has pushed inflation higher.
And such large moves may be warranted. Garthwaite says leading indicators suggest the US economy remains very strong and the Fed may have to work much harder than the market expects to cool inflation. He can see wage growth plateauing, but he’s far from certain it starts to fall any time soon. And so there is a danger that the resilience of the US economy – to COVID-19, to the war in the Ukraine, to the energy shock rippling across the world – will force rates up much higher than markets are currently pricing in, eventually hitting equity markets.
“I think the idea the Fed would intervene if the stock market fell 20 per cent, I just can’t see the ‘Fed put’ this time, and perversely, you might argue there is a bit of a ‘Fed call’. In other words, maybe they want to get asset prices down a bit.”