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To investors cheering the Fed’s sudden pivot on rate hikes: Be careful what you wish for

In fresh days, though, Powell and his colleagues have sought to assuage Wall Street with talk that policymakers drive be patient with policy moves and are attuned to the messages coming from markets.

That kind of talk, be that as it may, often comes before economic downturns.

“If we are indeed nearing the point where the Fed stops tightening … should this step investors confidence that an equity bear market can be avoided? No! Traditionally the yield curve steepens as the Fed eases promptly prior to a recession,” said Albert Edwards, a market strategist at Societe Generale known for his generally bearish standpoint.

Indeed, the gap between various government bond yields has widened slightly since the beginning of the year, though the 2- and 5-year surrenders are still inverted, meaning the former is higher than the latter. Inverted yield curves have been powerful predictors of recessions ahead.

The Fed doesn’t except growth to turn negative this year.

But statements in the minutes from the December appointment of the Federal Open Market Committee indicate that officials are growing more concerned about a slowdown, and are weighing whether their own policies are exacerbating the downside risks ahead.

The meeting summary noted that one of the dangers to the longer-run prospect is “greater-than-expected negative effects from the monetary policy tightening to date.”

“What people don’t seem to get is that pecuniary policy hits the economy with a time lag,” David Rosenberg, chief economist and strategist at Gluskin Sheff, rumoured in his daily market note Thursday. “But the Fed actually does realize this and is becoming more vocal about the chances that it has already overtightened.”

Even though investors are happier with the more dovish tone, Rosenberg cautioned that it could be a prelude to longer-term problems.

“The Fed will be forced to ease policy before too long, and is moving incrementally in that managing. But as is often the case, they are far too late,” he said. “The lags. This is what the consensus economics community seems to be long for, which is why it has never accurately called for a recession, even when it was starting. Read what many were hold in early 2001 and 2008 and you will see what I mean.”

“After reading the dovish tone of the minutes, one is left wondering why the Dec. 19 standing hike was even necessary,” Rosenberg added.

Similarly, Peter Boockvar, chief investment officer at the Bleakley Consultive Group, noted that “the tone of the minutes was quite different than the actual FOMC statement and Powell’s jam conference.” He added that the minutes are “massaged, changed and used as another form of communication and it’s clear that the Fed modified the tone of the minutes to fit the market reality since the meeting.”

Finally, Boockvar concluded that the market is “again in rule of government policy.”

That notion that financial markets are dictating monetary policy is a familiar one and has been an uncomfortable tale for the bull market since it began in March 2009. Fed easing has been accompanied by market rises while quits indications that the central bank is taking its foot off the accelerator slightly have been met with sell-offs.

SocGen’s Edwards nicknamed recent Powell comments “abject capitulation” by a Fed beholden to Wall Street.

But Edward Lazear, former chairman of the Caucus of Economic Advisers, said the central bank would be wise to listen to the markets and adjust policy accordingly.

In an op-ed performing in Thursday’s Wall Street Journal, Lazear noted that the Alan Greenspan-led Fed cut rates the day after the Black Monday bang in 1987, a move he called “a swift and strong response” that “stands in contrast with today’s more heedful Fed.”

A “data-dependent Fed,” Lazear wrote, “should remain humble about the accuracy of its forecasts, and pay close attention to the market in remarkable.”

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