Although recent economic data has told a similar story, the market, cursed with a short term memory, panicked as visions of a 50 basis point hike danced through the minds of traders. While we continue to believe that a 50 basis point hike will be necessary if the Fed hopes to stop the recent acceleration of consumer demand dead in its tracks, the presence of the ever cautious Fed Chairman tilts the odds in favor of a 25 basis point move. Yesterday's record consumer confidence figures indicate that in the battle between Wealth Effect and FOMC, next week's expected 25 basis point hike is likely to prove to be little more than a futile waste of energy on the part of the Fed. The Conference Board's Consumer Confidence Index rose to a record 144.7 in January as rising stock prices and the best jobs market in decades more than compensated for the slight annoyance of rising bond yields and mortgage rates.
Inflationary pressures are unlikely to be limited to the wage front, however.
The need to avoid a global outbreak of inflation will force the Fed to take far more severe action in the coming months than many expect, and with that action F.I.S.T., Fed Induced Sensory Trauma, is likely to rule the stock markets of the U.S., U.K., and Europe with an iron fist as the first half progresses and it becomes apparent that the rate hike cycle is far from over. Monday's Guynn-sian Rate Jitters Chasm could become a common resting place in the months ahead unless the consumer quickly becomes a little less confident. All Rights Reserved. Republication of this material, including posting to message boards or news groups, without the prior written consent of Tulips and Bears LLC is strictly prohibited.