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The US Fed raised interest rates by 75 basis points in its July meeting, for the second month in a row. Powell in his speech then said a similar move was possible again, shrugging off speculations that the US economy is in recession.
“While another unusually large increase could be appropriate at our next meeting,” that’s a decision that will depend on the data between now and then, Powell had said during a press conference in Washington.
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Wood said the previous Powell chatter had given a boost to the peaking-out-of-inflation trade.
“Fed follows the markets, and not the other way around,” he wrote, adding that GREED & fear would be amazed if the June lows are not re-tested.
Wood said the key issue in the coming months will be whether the Fed keeps going until inflation is below 2 per cent or would the US central bank backs off well before that. Wood said he still expects the latter outcome, but such a reversal is not imminent.
Valuation guru Aswath Damodaran had in a tweet earlier this week said given the unsettled market much of this year, it looked like investors had reached a consensus on a soft landing of the US economy and a quick drop off in inflation, allowing US stocks to recover strongly.
Damodaran said as cracks emerged in that consensus in the last few days, with fresh concerns about how soft the landing will be and whether inflation will persist, US stocks are down again.
“Since inflation concerns first surfaced in early 2021, investors have underestimated its potential for damage and overestimated the Fed's powers to bring it back under control. My picture from May 2022 on how this will play out in the market still holds," he tweeted.
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