Fed Chair Jerome Powell and his colleagues are expected to raise interest rates by 50 basis points on Wednesday and signal they’re on track to lift them to around 2.5% by the end of the year. But it’s not clear if that’ll be enough to tame inflation, which is running at more than three times the central bank’s 2% target. 

Rogoff spoke about the “risks of having a perfect storm” of recessions, where European economic growth contracts because of Russia’s war in Ukraine, China’s does the same due to “a failed Covid lockdown policy,” and the U.S. economy shrinks because the Fed “tightens too much, too fast.”  

“If China has a supply recession, which is really what we’re talking about, that’s going to feed inflation, it’s going to hurt demand in Europe,” Rogoff said. “I would say the risk has risen palpably, that this might happen,” he said of a U.S. economic contraction that would hit global financial markets. 

“Things could work out well, and so there’s a lot of uncertainty -- but it’s not hard to see all of these risks,” he said, adding that China “might already be bordering on recession.”

Eoin Treacy's view

Over the last month Treasuries sold off aggressively, the Dollar surged, major stock market indices pulled back sharply, and gold contracted. Conventional energy sources like natural gas and coal surged while crude oil has been steady.

These trends have been pricing in both the potential for successive 50-basis point interest rate hikes and the supply disruptions arising from Russia using commodities as an economic weapon. Tomorrow’s Fed meeting will deliver news on the interest rate front but will do nothing to change the Ukraine question.

The primary aim of the Federal reserve is to quell inflationary expectations. Against a background of tight commodity supply and slowing Chinese manufacturing, the only solution is to kill off demand by slowing growth. That’s usually a positive for Treasuries which continue to pause below the psychological 3% level.
Small caps are generally more growth sensitive than large caps and the Russell 2000 has been underperforming since peaking late last year. It is now testing the region of the 1000-day MA and the upper side of the underlying range. This is a potential area of support for at least a bounce.
Gold is also testing the upper side of an underlying trading range and an important moving average (200-days).

The Dollar’s strength has reduced the value of global central bank balances even before quantitative tightening begins.  The total assets of central banks chart has contracted by $1.75 trillion since mid-February. That has unwound about 13% of the pandemic liquidity infusion but is already more than the tightening in 2018 in absolute terms. Any signal that the Fed will not hike as aggressively as expected will fuel a significant short covering rally in both stocks and bonds. If they come out more hawkish than expected both the S&P500 and Nasdaq-100 are likely to fully revert back towards the 1000-day MA.