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US Federal Reserve
OpinionComment
Richard Harris
Richard Harris

The View | Expect a year of shock and recovery as interest rates and prices rise

  • The stock market will fall once the Fed finally raises rates, but it is not yet time for the next big monetary collapse
  • While there are many reasons to be cheerful, events are still building to a crescendo of worsening conditions in 2023

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The US Federal Reserve building in Washington on December 15, 2021. The Fed has been accused of ignoring rising inflation for too long, setting up equities markets for a nasty fall when interest rates eventually rise. Photo: Xinhua
Richard Harris
It is a truth universally acknowledged that the stock markets will take fright at the first whiff of interest rates rising. This year might well prove that wrong as the two prize fighters, interest rates and inflation, duke it out.
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As with any sporting contest, fortunes will ebb and flow. That could lead to investors getting whiplashed as we don’t know when the first knockdown will come.

The eventual winner might not be known this year, but whoever it is will dominate financial narratives for the next few years and radically change the kind of investments that should be held.

The decisions to be taken this year by the US Federal Reserve Board are at the heart of all investment thinking. It has proved surprisingly stubborn in the face of reality, fighting against raising interest rates while fearing the economy is too weak.
Rates have been too low for too long, but the board would lose face if it admitted that inflation is high and rising – something its low rates have encouraged. Its aim is to support the economy, yet it provides easy money to rich people worried about share prices. The policy of zero interest rates has ruined traditional rational investment relationships because it was irrational in itself.

US politicians have consistently appointed economists to the Federal Reserve Board, when everybody knows that economists drive using the rear-view mirror. They should be appointing bankers or investment managers to the highest levels of the central bank as their whole careers depend on looking ahead. They need to have some guts with their forecasting, even if sometimes that is actually just indigestion.

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