As the Federal Reserve bank released meeting minutes yesterday it played down the path of asset reduction that would start from the may meeting. This would be most probably be accompanied by the 50bps rate hike.
If this had been 2016 then there would be not many of the issues in what they were planning on doing. But the current environment is different though the financial impact would be the same but quicker. Quick rate hikes and asset wind-down may be able to beat inflation but for sure it will destruct demand. And this is what might be the mandate given to Fed.
How can this be said and can we be sure of the impact?
If you glide through the various speeches by Fed governors especially Chairman Powell from September 2021. There is a clear trend of stress and anxiety that inflation brings to the Fed and by the December 2021 speech it becomes evident that they are way behind the curve.
Post this realisation when the reversal trajectory speed is looked at then there s a pattern of not being over-optimistic with impact. Some speeches do convey that three is a liquidity risk and other negative impacts due to its actions.
If you look at the world and especially read the current manufacturing PMI (purchaser manager index) there are evident signs of slowdown due to recent record low sentiment, record inflation due to supply chain issues, and panic buying along with buffer creation.
These real-world factors with aggressive central banks fighting unbeatable inflation would have the highest probability of a recession by late 2022/early 2023. And the solution would be NIRP ( negative interest rate policy ) with the largest QE5.
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