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Markets butt heads with central banks

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February 6, 2023

Markets are fighting with central banks — bullish markets are boosting prices as central banks try to fight inflation. While the Federal Reserve raised interest rates, investors have paid more attention to remarks by Fed Chairman Jerome Powell that central banks will soon move into disinflationary processes, according to a Bloomberg report posted on Yahoo! Finance.

"The market is kind of playing a little bit of a game of chicken, hoping they can influence the Fed into cutting this year," Shana Sissel, Chicago-based founder and president of Banrion Capital Management, told Bloomberg.

However, Sissel emphasized the Feds want to see inflation come down to their 2% target and stay there, for a few months, "before they would even consider something like that."

If bullish investors are betting on rate cuts, then policy makers might have to tighten rates for longer periods of time.

Some investors don't buy the rhetoric, claiming it is tough talk.

"Central banks are talking tough — 'higher for longer, the job's not done' — but once economies start to collapse because of the speed and magnitude of their earlier tightening, the market will price recessionary policy paths regardless of the level of inflation," Kellie Wood, a fixed-income money manager at Schroders Plc in Sydney, told the news outlet

Sissel is concerned central banks will become too influenced by the market and not upset the market too much, which isn't "their job."

While it is possible central banks could reverse course, many experts still see that as being down the road.

"It's clear that we still have a way to go on the inflation front before either central bank is at a point where they've historically cut rates," Henry Allen, strategist, told the news outlet. "And both are cognizant of the experience from the 1970s, when inflation returned after policymakers eased up too quickly."