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By Michael O’Neill

Market commentary and analysis are almost exclusively focused on the Federal Reserve’s monetary policy and interest rate outlook.

What will they do? Will they hike 25 basis points or 50 basis points next month? Will they pause and evaluate the impact of 450 bps of tightening since March 17, 2022? When will policymakers say, “Job done,” and cut rates?

The Fear of Missing Out (FOMO) crowd dismissed hawkish comments from Fed Chair Jerome Powell at his post-FOMC meeting press conference on February 1, and took the S&P 500 index to a 2023 peak the next day. It was an obvious “dis” to the policymakers, as the rally indicated traders believed that because the Fed bungled the inflation file once, they would do it again.

But the FOMO crowd is fickle and just a negative headline or data point away from morphing into a FOBW (fear of being wrong) mob. Positions started being trimmed after the surprisingly robust nonfarm payrolls report and the ISM Services PMI data and intensified following hawkish remarks from Fed policymakers.

The result is predictable. The S&P 500 is in negative territory for February but still up over 4.0% for the year. The FOBW crowd helped propel the US dollar to gains against the G-10 major currencies since the last day of January, but the greenback is still lower than where it started in 2023.

Analysts and traders were hoping that the FOMC minutes would provide some clarity as to the Fed’s intentions. They didn’t get it.

Similar scenarios are playing out in developed markets, including Canada.

Bank of Canada Governor Tiff Macklem told the House of Commons Standing Committee on Finance that the BoC expects to leave the policy rate at its current level (4.50%) while policymakers assess the impact of eight consecutive interest rate increases. He called it a “conditional pause,” then went on to say, “Inflation is turning the corner.”

Do you believe him? Why should anyone? Why does he still have a job?

Mr. Macklem nearly shed crocodile tears reading the opening statement for the October Monetary Policy Report press conference.


He said, “We are mindful that adjusting to higher interest rates is difficult for many Canadians.” Many households have significant debt loads, and higher interest rates add to their burden. “We don’t want this transition to be more difficult than it has to be.”

He did not mention being mindful of his emphatic prediction from July 14, 2020. He gave Canadians and Canadian businesses the green light to load up on debt when he announced, “If you’ve got a mortgage, if you’re considering making a major purchase, or if you’re a business and you’re considering making an investment, you can be confident rates will be low for a long time.” Canadians took him at his word. Unfortunately, Mr. Macklem didn’t define “a long time.”

However, when the chief of the central bank tells people to get a mortgage, “a long time” implies a period lasting far more than two and a half years. How many people buy a house with just a two-year mortgage? Bill Gates, Elon, anyone else?

Mr. Macklem is still muddling the message. The BoC announced a 25-bp rate bump in January and said, “We expect to hold the policy rate at the current level while we assess the impact of the eight rate hikes.” He repeated his comment on February 16. Don’t believe a word. 

Mr. Macklem is already spinning the next rate hike as a reaction to greedy businesses taking advantage of price increase confusion to jack up prices. He said, “When an economy is overheated, when inflation is high, when people see prices of everything going up, it makes it easier for companies to raise their prices because people can’t tell, is this a generalised increase or is this just this company raising their prices?”

The global interest rate discussion changes like the weather. Even though the shifting rate outlooks disrupt financial markets the way a massive snowstorm disrupts travel in Florida, you know it won’t last. It never does.

The bigger risk is the rapid escalation in geopolitical tensions. The Who once sang about a deaf, dumb, and blind kid who played a mean pinball. Well, the kid is 54 years older now, and he appears to be in charge of assessing world-wide financial market risks for traders.  He hasn’t heard or seen or said anything.

What will have the largest impact on financial markets-a 50 point Fed rate hike or a nuclear missile cooking off in Kyiv?

To many in the west, Russia’s invasion of Ukraine is a local problem or at worst a European issue. They want to believe that fear of American military intervention will contain hostilities, and that the many sanctions levelled against Moscow and top citizens will force a halt to the hostilities.

Russian doesn’t fear the US. They have aligned themselves with China, Iran, North Korea, and Belarus, two of which have nuclear weapons. They are the new and supersized Axis of Evil.

President Biden comes across as a cadaver looking for a crypt. Xi Jinping sees Genghis Khan when he looks in the mirror. Kim Jong-Un is as crazy as a loon and the guy from Belarus is a Putin puppet.

Traders should be hoping for the best but hedging for the worst. A fifty-point rate bump will be far less disruptive to markets than a 50-megaton missile strike.