THIS is An Economic Crisis We Haven’t Seen In Our Lifetime

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It could be that investors are proving hasty. After the last two Fed meetings, big gains were followed by even bigger selloffs, as Katie Greifeld and Vildana Hajric show here.

But many economists are puzzled. Bill Dudley, a former central banker, says markets are underestimating just how far the Fed will go to tame inflation.

He noted Powell repeatedly pointed to the Fed’s June projections that showed officials expected to raise rates to about 3.4% this year and 3.8% in 2023.

That “suggests to me that the Fed thinks they’re going to do quite a bit more than what’s priced into the markets,” said Dudley. He now advises Bloomberg Economics, which forecasts rates to eventually reach 5%.

Given all that hawkishness, what explains the upbeat markets? The assumption is investors are betting Powell is going to pivot.

Economists at Goldman Sachs saw five reasons in the chair’s comments to think the Fed will now slow the pace of rate hikes:

Getting to 3.4% this year is consistent with smaller increases
Powell called 75 basis point shifts “unusually large”
Powell said the full effect of tighter policy has yet to be felt
The Fed will react data rather than inflation alone, Powell said
He reiterated officials aim to rebalance supply and demand through softer growth, not a recession

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