Crash test this week for market versus real world

Bloomberg/John Authers/1-30-2023

photgraph of a rostrum awaiting the arrival of a spokesman for the Federal Reserve

“The Fed, [former Treasury Secretary Lawrence Summers] says, is ‘driving the vehicle on a very, very foggy night, when the economy could yet go either way.’ The market is rallying, meanwhile, as though it’s a clear day with a long straight road ahead and not a car in sight. And in doing so, it comes up against the paradox that has dogged every attempt at a rally over the last year. Central bankers want to slow down the economy, and hope to use tighter financial conditions to achieve it.”

USAGOLD note: Authers worries that the rosier conditions and the recent stock market rally will induce surprise hawkish outcome to this week’s Fed deliberations. He quotes Academy Securities’ Peter Tchir: “If the demons are getting to the Fed, the financial conditions give them a real world metric to support them being more hawkish than markets have priced in. At this point I believe that markets have priced in what the Fed ‘should’ do and not what the Fed ‘will’ do.”

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