Capital markets essentially provide the conduit for money to find its way into rewarding assets.

For that to work properly, the market prefers relative stability and liquidity. 

Volatile markets make prices less reliable.

Liquidity dries up quickly during periods of financial stress.

At last month’s FOMC meeting, chairman of the Fed, Jerome Powell, announced the third 75-basis point-rate hike in a row.

What got attention was the degree to which the Fed is projecting the need for tighter monetary policy.

Some argue that financial conditions are already tight enough.

The price of commodities, housing, and goods have already started coming down.

Therefore, it is important to ask: Is the Fed looking at the same market-oriented data that stock market participants are looking at?

By his own admission, Chairman Powell referred to the data as by default, lagging.

The market is concerned that the Fed will tighten financial conditions well beyond the point at which it would be necessary to tame inflation.

At the September 2021 Fed Meeting, when housing prices were rising at an accelerating rate, the Fed may have been complacent.

The view was that inflation was ‘transitory’.

The Fed may be guilty of two policy mistakes.

They under-corrected when they should have started tightening monetary policy.

Once inflation got out of control with a 40-year high, the Fed had to act aggressively. 

Now they may be over-correcting to the other side.

What is the conclusion? Patience.

The market needs to have patience with the Fed.

The market needs to accept that the Fed is always a bit behind due to their need for concrete evidence.

Investors need to have patience with the market. 

Modest interest rate hikes of 25 to 50 basis points are far easier for the market to absorb.

It is highly unusual to increase interest rates 3% during one calendar year, and we are not done yet!

The market needs to see the Fed pivot to at a more neutral stance.

The Fed will not budge until it has clear evidence that their inflation indicators are coming down.

Investors should not be deterred from their long-term investment plans.

While this should have been a lengthier and more boring process, the task at hand is no small feat. 

We are resetting global financial conditions to a post-pandemic world.

Patience is a most worthy virtue indeed.

Mendoza Private Wealth

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