The Federal Reserve hit the pause button at the June meeting and signaled that more rate hikes could be around the corner, but at least one analyst believes that the central bank may have overreacted.
What Happened: Ark Invest founder and money manager Cathie Wood took to Twitter on Friday to comment on the Fed’s move.
Wood shared a chart of the rate moves since early 1971 to show that the Fed’s current tightening cycle has been more severe than the past cycles, including the one between1980 and 1981 that crushed inflation.
“So far, unprecedented Fed tightening has broken the regional banks and commercial real estate. What will deflation destroy next?” she said.
While the Fed has noted that inflation has stubbornly remained above its target, Wood has in the past sounded her view that the central bank is relying on lagging indicators. She has argued that the prices of several commodities have dropped significantly from their pandemic highs.
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Why It’s Important: Most economists believe a recession is in the cards in the second half of the year, as the economy wilts under the cumulative impact of the Fed’s successive rate hikes.
After lowering rates to near-zero levels following the COVID-19 pandemic, the Fed, under the chairmanship of Jerome Powell, began raising interest rates in March 2022. The Fed was panned for not timing its rate hikes right as inflation had begun rearing its ugly head.
The Fed hiked rates in all of its meetings before it decided to pause in June. The central bank has cumulatively raised rates by 4.75%-5% in a year’s span and as a result, the fed fund rate currently stands at a 16-year high of 5-5.25%.
Powell signaled at his semi-annual monetary policy testimony before Congress this week that the central bank may not be done with its rate hikes yet and remains data-dependent.
The banking crisis that led to the collapse of at least three mid-sized banks this year has been blamed for the Fed’s actions. And analysts warn that the crisis may continue. The commercial real estate market is also in the doldrums with occupancy rates remaining low. The Fed rate hikes, along with remote work and the regional banking crisis, have led to the predicament.
Economic data released last week, including the jobless claims and the Conference Board’s leading economic index, have signaled a weakening of the economy, which, at one point, held up resiliently amid the rate hikes. The Fed has a fine line to balance as it contemplates its next move at the upcoming July meeting.
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Image and article originally from www.benzinga.com. Read the original article here.