David Rosenberg: How Investors Can Profit from the Fed’s Missed Opportunity to Follow the Bank of Canada’s Lead
The Puzzling Preoccupation of the US Federal Reserve with Economic Indicators
The United States Federal Reserve has been unprecedentedly preoccupied with contemporary and lagging economic indicators. This is perplexing, especially compared to the approach the Bank of Canada took, which has already paused its tightening cycle. This article will explore why the Fed has failed to follow the Bank of Canada’s lead and the implications of this for the US economy.
The Bank of Canada’s Approach
The Bank of Canada has been leading the way in the tightening cycle and has already paused. Governor Tiff Macklem is operating under similar crosscurrents of cycle-high lagging and coincident indicators but steadily deteriorating leading indicators, a tight and red-hot labor market, and elevated inflation. However, the latest consumer price index (CPI) data went in the other direction and surprised the low side. Still, the domestic shelter component in Canada responds to the high-frequency data with shorter lags.
The US Federal Reserve’s Approach
Despite this, the US Federal Reserve has not followed the Bank of Canada’s lead and has instead decided to continue its tightening cycle. This is even to three more hikes; no pivot is expected for this year. Furthermore, the Fed is seemingly unconcerned by the stock market’s reaction since October, which has been fighting the Fed hard and is instead focused on its perceived loss of credibility this cycle. This is evidenced by its fear of prematurely ending the tightening cycle and its preoccupation with financial conditions.
The implications of the US Federal Reserve’s approach are far-reaching. The fact that the Fed was still hawkish at 3,600 on the S&P 500 and was frustrated as it approached 4,200 in early February, or even near 4,000 today, suggests that the Fed is more concerned with its credibility than the economic data. This could harm the US economy, as the Fed’s actions could lead to further market volatility and economic uncertainty.
- The S&P 500 entered a bear market last fall, which in the past was always a signal to either pause or pivot.
- The Fed is consumed with financial conditions, a critical input to its macro forecast.
- The risk-on rally since last fall is not what the Fed wanted to see.
The US Federal Reserve’s preoccupation with economic indicators and refusal to follow the Bank of Canada’s lead in pausing its tightening cycle could have far-reaching implications for the US economy. Moreover, the Fed’s focus on its credibility and financial conditions could lead to further market volatility and economic uncertainty.
The US Federal Reserve’s preoccupation with economic indicators is puzzling and unprecedented. The fact that the Fed has not followed the Bank of Canada’s lead in pausing its tightening cycle could have serious implications for the US economy. Clearly, the Fed is more focused on its credibility and financial conditions than the economic data, which could lead to further market volatility and economic uncertainty.