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Federal Reserve plays Russian Roulette

Over the last three trading days, global markets have seen large moves that have shaken the theory of the Federal Reserve will be done with rate hikes by the July meeting. This was mainly crashed by the high-speed inflation that is now beating the highest estimates.

To quickly recap, Thursday saw a large fall in equities with the pending spike in VIX(Volatility Index) because before it was trading cheap compared to the S&P500 level. This change of movement or catching up was accompanied by more than $10bn of selling in the market on close (Last 30 mins) sessions of the last three days. All this was the result of an inflation release on 10th June that was above the best estimate leading to the Fed Swap Rate(Federal Reserve Rate Estimates) market to switch to accelerated rate hikes.

Though it is unlikely that Fed will change its stance in such a manner but the low liquidity in every market will provide such wild swings in a short period. And the issue is that it will become a norm starting from this month till at least September as the central bank begins its asset reduction program. This will surely make markets more illiquid but it will not impact the liquidity of banks as they have above $2 trillion in reverse repo waiting for the "right moment".

An interesting fact to know, historically whenever the USA CPI (consumer price index) has crossed 5% it has not reduced until there is a recession or the Fed fund rates are above it. But then again history has been defied many times in past months; will it do the same this time or repeat itself?


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