When, in 2022, James Bullard defended the need for the FED to start raising interest rates relatively quickly, with a view to controlling inflation, which at the time was evidently well above the limits of the price stability mandate, investors had their first warning. about a period that would inevitably dominate the US financial scene, but also across the globe. I am referring to the unavoidable normalization of monetary policy, after many years of an oasis of easy and cheap money that nullified good risk management practices due to excessive liquidity in the system.
It was necessary to wait for 2023 for the US central bank to finally start working to contain inflation, which in the meantime with the war in Ukraine received a strong dose of stimulus, forcing Jerome Powell and his colleagues to hit the pace in a way never before had occurred. Now, as Powell mentioned in May of this year, but which was already obvious when Bullard defended higher interest rates in the middle of last year, this process of controlling inflation, via interest rate hikes and the reduction of the Fed’s gigantic balance sheet, triggered and will continue causing pain in the markets, through significant corrections in equity indices.
It remains to be seen how much pain and for how long, given that the space for interest rate hikes is significantly reduced as the economy enters a recession, since raising interest rates in recession is a recipe that can lead to a very painful hangover for families and public accounts, in other words, difficult times are ahead.
