“Don’t fight the Fed” – why the markets are threatened with a rude awakening

Dusseldorf An old investment rule is: “Don’t fight the Fed”. The bottom line is that you should never bet against the Federal Reserve because it always backfires. But for the past few months, it has seemed like many investors are ignoring this rule.

Both the US Federal Reserve and the European Central Bank (ECB) further increased key interest rates at the beginning of the month and, above all, announced further interest rate hikes.

Nevertheless, the feared drop in prices did not materialize – quite the opposite. Both equity and bond prices even rose significantly after the recent Fed and ECB interest rate meetings.

However, there could be a rude awakening for the markets in the coming weeks and months. Because some economic data for the USA have recently turned out better than expected. In addition, inflation is proving to be extremely persistent. That could force the Fed to hike rates more and faster than expected.

“If inflation only decreases incredibly slowly, then you have to expect that there will be one or two more interest rate hikes,” says economics professor Harm Bandholz from Kiel University of Applied Sciences in the new episode of Handelsblatt Today.

Bandholz, who was longtime US chief economist at Unicredit in New York, worries that the Fed may be going too far in its rush to contain inflation. Nevertheless, his outlook for the stock market this year is positive, as he explains in an interview with host Anis Micijevic.

More: How the Fed is preparing markets for the next phase of rate hikes

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