Markets May Shrug Off The War. But They Can’t Ignore Jay Powell.

The stock market has been highly volatile, and that’s no surprise given the invasion of Ukraine and the uncertainty surrounding the situation.

Last Wednesday, stock markets staged a mini-crash that extended into Thursday morning. At the same time, gold soared and rose over $100 per ounce in a matter of days.

Then around noon on Thursday, Biden gave a press briefing in which he announced sanctions on Russia. Those sanctions were quite tame and would easily be worked around by the Russian financial system.

The markets breathed a sigh of relief. Stocks rallied Thursday afternoon and again on Friday. Gold went in the opposite direction and sank back down below the $1,900 per ounce level. The shooting war would continue, but it looked like the market’s worst fears of a financial war spinning out of control were unfounded.

Then came another shock. On Saturday night, the White House confirmed that the U.S. and other Western nations were imposing much tougher sanctions on Russia, including expelling many Russian banks and the Central Bank of Russia from the SWIFT communications network that is the central nervous system of the world’s major currencies and banks. That sets things up for a bloodbath on Monday.

The sanctions that the market was pricing for on Wednesday were now being put in place for Monday morning. The rally on Friday may turn out to be a head fake now that strong sanctions will be in place. With all of this war anxiety, don’t forget about the Fed.

This article serves as a good reminder that we have another Fed FOMC meeting coming up on March 16^th. This is the meeting where the Fed will announce the end of the taper and may begin actually reducing the money supply instead of expanding it.

It’s also the meeting where the Fed will announce a “liftoff” in interest rates with a 0.25% rate hike. (Markets were betting on a 0.50% hike, but we said 0.25% all along).

Market expectations are now in line with our forecast. The Fed has a job to do in terms of fighting inflation, but they also don’t want to tighten too far, too fast because they could put the economy into a recession very quickly.

This is a delicate balancing act. The Fed will get it wrong.

The Atlanta Fed GDPNow forecast shows 0.6% annualized growth for the first quarter. That’s a rounding error away from recession. Don’t be surprised if we’re in a recession soon, especially with the new Fed tightening on the way.

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