Stocks Open Eyes, See Fed Pivot Hawkish; ECB Hike into Recession, Start QT; BoE Hike into Recession; SNB Hike, Sell Foreign Currency Assets

ECB’s assets drop by €800 billion. Mexico hiked too today, way ahead of the Fed, keeps peso from falling against USD.

By Wolf Richter for WOLF STREET.

On Thursday, the S&P 500 Index dropped 2.5%. Since the Tuesday morning spike, it plunged by 5.0%. The Nasdaq dropped 3.2% today. Since the Tuesday morning spike, it plunged by 6.5%. In Europe, stock indices were deep-red, with the German DAX and the French CAC 40 down over 3% for the day, and down by about 4.4% since the spike on Tuesday.

This comes after the Fed pivoted even more hawkish yesterday, pointing at a peak rate of over 5%, and taking any rate cuts in 2023 off the table, and after the ECB this morning pivoted more hawkish and hiked by 50 basis points into the recession that it now sees, and said that it was “obvious” that there will be a series of 50-basis-point rate hikes despite any recession, and it announced that QT related to bonds would start in March, after it had already started QT related to loans at the prior meeting, which already caused its balance sheet to drop by 9%.

And it comes after the Bank of England today announced a 50-basis-point rate hike even as it sees a recession. And the SNB announced a 50-basis-point rate hike and said that it sold foreign-currency assets. And to not be left behind, the Bank of Mexico announced a 50-basis-point hike. And all of them put more rate hikes on the table.

The ECB is now hiking into a recession, according to its own economic forecast. It expects this recession to be “relatively short-lived and shallow” starting this quarter. But it could get worse, according to ECB president Christine Lagarde, who added at the press conference that “risks to the economic growth outlook are on the downside, especially in the near term.”

It hiked its three policy rates by 50 basis points: the deposit rate to 2.0%; the main refinancing rate to 2.5%, and the marginal lending rate to 2.75%.

Hiking rates into a recession is very hawkish. And it revised up its inflation outlook.

“Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive….” Lagarde said, adding, “It is pretty much obvious” that “steady pace means we should have to raise interest rates at a 50-basis-point pace for a period of time.”

The ECB is grappling with raging inflation: Overall CPI inflation at 10%, with CPI inflation without energy at a record 7.0%, and some Eurozone countries at over 20% and even Germany at 11%. Inflation began soaring in 2021, after years of mega-QE and negative interest rates. And suddenly it’s a huge mess.

QT related to bonds will start in March 2023, it said today, by shedding €15 billion a month in bonds through 2023. The pace of subsequent declines “will be determined over time.” Details will be announced after the February meeting, it said.

QT related to loans already started at its October meeting to “help address unexpected and extraordinary inflation increases,” as it said at the time. To do so, it made the terms and conditions of its Targeted Longer-Term Refinancing Operations (TLTRO III) less attractive for the banks, which would speed up the banks’ exit from those loans.

These loans have dates at which they can be paid back, and two of those pay-back dates have already passed:

  • In November, the banks returned €296 billion to the ECB, which was booked on the ECB’s balance sheet on November 25.
  • In December, banks returned €447 billion in loans, which haven’t been booked yet, but will be booked in December.

This TLTRO III unwind was the main factor in reducing its balance sheet by €803 billion, or by 9.1% from the peak in June. The green line is my estimate of the next balance sheet based on the announced €447 billion TLTRO III reduction. Total assets will drop to about €8.03 trillion:

The Bank of England also hiked into a recession, by 50 basis points today, to bring its bank rate to 3.5%. Citing its Monetary Policy Report, it said that “the UK economy was expected to be in recession for a prolonged period and CPI inflation [currently 10.7%] was expected to remain very high in the near term.”

The Swiss National Bank sold foreign currency assets & raised its policy rate by 50 basis points to 1.0%, after its 75-basis-point-hike in September, and its 50-basis-point hike in June, and put further rate hikes on the table. Gone is the negative policy rate of -0.75%.

It’s doing so to counter “increased inflationary pressure and a further spread of inflation.” Inflation in Switzerland was 3.0% in November and “is likely to remain elevated for the time being,” it said.

“We have sold foreign currency in recent months to ensure appropriate monetary conditions. We will also sell foreign currency in the future if this is appropriate from the monetary policy perspective,” SNB head Thomas Jordan said in his remarks. This follows his announcement in June and September that the SNB would do so.

And the SNB has done so. In the second and third quarter, as we know from the SNB’s SEC filings, it unloaded hundreds of thousands of shares of its biggest holdings of US stocks, from Apple, Microsoft, Alphabet, Amazon, and Meta on down. And it has taken massive losses as asset prices in its huge portfolio of foreign-currency-denominated securities have dropped.

The Bank of Mexico hiked by 50 basis points today, to 10.5%, after having hiked by 75 basis points four times in a row, mirroring the Fed. Core inflation in Mexico rose to 8.5%.

The Bank of Mexico started hiking in mid-2021, from 4.0%, nearly a year ahead of the Fed, to stay ahead of the Fed, similar to Brazil and some other central banks. They did this to grapple with inflation at home and to support their currencies against the USD.

Which worked. Over the 18 months of rate hikes, the Mexican peso has strengthened against the USD, while the currencies of the laggards such as the ECB and the Bank of Japan watched their currencies take a drubbing.

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  149 comments for “Stocks Open Eyes, See Fed Pivot Hawkish; ECB Hike into Recession, Start QT; BoE Hike into Recession; SNB Hike, Sell Foreign Currency Assets

  1. JX says:

    i am a bit surprised by the quick follows from BOE/ECB. the coordinated raises seem to wake everyone up a little from their hallucination.

    • Leo says:

      Majority of tech leaders still plan to expand burning more cash in 2023.

      Also there were few layoffs despite poor results, that would lead to even worse results for this quarter as costs remain high in face of decreasing business. A sane wallstreet would be punishing stocks like Intel and Alphabet, but they were instead waiting for Pivot.

      So, if wallstreet gets to smell NARCAN, expect deep corrections in NASDAQ. That may follow with broad layoffs in next quarter.

      • joedidee says:

        all chip makers are planning on it and are building as we speak
        since chips act gave all big companies $285,000,000,000 of free taxpayer fiat $dollars
        and the coming inflation PRODUCTION act well that ought to bring about another year of 30% inflation like 2022

  2. Djreef says:

    “The ECB is now hiking into a recession“

    The Fed will do the same as they all fall over the cliff together..

    • Wolf Richter says:

      No, not over the cliff… But that’s what it takes to get inflation under control. They know that.

      • Djreef says:

        Thelma and Louise economics. Sorry Richter, but tightening into a recession is a bad situation deemed to get worse.

        • Old school says:

          The damage is done in blowing the bubble. Fed can try to ease us through the malinvestment recognition, but the borrowing of money for money losing activities has got to be dealt with one way or another.

          In some ways higher education is a canary. A lot of borrowing for an education that can’t earn a return. Current policy of can kicking the debt is a bad one. Unpayable debt needs to be dealt with so you can get on with the show.

        • Old Ghost says:

          It could get interesting. It has long seemed to me that a lot of US financial activity produces nothing of real lasting value. Every winner comes at the expense of a current or future loser. The only thing this “zero-sum” activity does is move money from one set of pockets into another — mostly upward, into the pockets of the ultra-wealthy.

          Those with the least to lose will be the ones paying the tab for all the past speculation.

        • Cytotoxic says:

          There’s no other way. Getting worse has to happen for things to get fixed. That’s been baked in for some time now.

        • gametv says:

          And what is the alternative? Have trillions of dollars on central bank balance sheets for eternity?

          We need to get back to honest economics, where the signals of the real underlying markets are not driven by central bank policies, but by underlying productivity of an economy. If there are no enough jobs or there is wealth inequality, it is a result of the productivity of an economy and the fixes are either changes to trade and taxation policies, education, regulations, etc.

          We need to do away with the dual mandate and have a single mandate – stable currency policy.

          A radical departure from the MMT idiots.

        • eg says:

          gametv, I see no evidence that MMT has in any way informed Fed policy, though I understand that the label has become an epithet in certain quarters not entirely conversant with the relevant heterodox macroeconomic literature.

        • NBay says:

          In other words, GTV likes simple black and white thinking.

          Just give me someone to blame and hate and call an idiot and I won’t have to face my own part in creating one big problem.

      • Djreef says:

        It is a necessary evil, though.


        It’s just a shame it came to this.

      • joedidee says:

        problem is of course inflation is NOT under control
        and with spendthrift CONgress
        chips act throws $285,000,000,000 at big chip companies
        inflation PRODUCTION act throws cool $1 T+
        and lets not forget $10B for illegals, $100B for biden war in ukraine
        spend spend spend
        while workers get paltry 8% raise
        I see 2023 with higher interest rates and 30% inflation in things we need

        • NBay says:

          Please tell people again how well you treat your OWN workers (if you even remember that particular story, it was within a couple days). Something about buying them all lunch, and handing out $1000 bonuses on a 3 day job, as I recall.

          You are a very “flexible” troll, to say the least.

      • Ray says:

        You can’t fix the dead pedestrian by shifting into reverse and running him over again!

    • Xaver says:

      The Central Banks are forced to admit that in an economy recessions are sometimes necessary to correct their own mistakes of loose interest rates and of using the printing press excessively.

      Obviously they prefer a recession to inflation spiraling out of control.

      • Bobber says:

        “Obviously they prefer a recession to inflation spiraling out of control.”

        I’m not so sure about that conclusion. I think central banks would be very happy with 3-5% inflation if they could somehow control the political fallout. They know elevated inflation will be required over a long period of time to delay a severe recession and support government spending deficits.

        The problem is that inflation erodes the debts, but continued deficit spending increases them. It’s like an engine doing 9,000 RPM. The engine may continue for a long time, but we know it will blow at some point. Current monetary policy has severe long-term flaws that are starting to become visible as a result of inflation. Central banks are extremely short-sighted.

        How many times have you heard central bankers and legislators say “we need to do….., but now is not the time”

        • Xaver says:

          I agree they like to have inflation as high as politically bearable. Right now they are under pressure to act against it. But we can’t be sure about their motivation.

        • sunny129 says:


          “I think central banks would be very happy with 3-5% inflation..”
          Why not 5-7%
          Mission creep
          When one cannot succeed lower the standards!

  3. 2banana says:

    We have seen the day that Mexico has more sanity in their fiscal policy than most of the rest of the world combined.

    “The Bank of Mexico hiked by 50 basis points today, to 10.5%, after having hiked by 75 basis points four times in a row, mirroring the Fed. Core inflation in Mexico rose to 8.5%.”

    • Frank Uzsoki says:

      +1, Mexico the smartest guy in the room, rates above CPI, always with leeway to drop if recession hits too hard. Bravo!

    • Kernburn says:

      Yeah, even Brazil, a country known for corruption, is at something like 13% now

      • Nick Kelly says:

        Ya because they and Mexico have to. Both have weak currencies. Remember the Tequila Crisis, aka the Peso Crisis?
        Another guy tells is how great Thailand is doing, forgetting the Thai Baht Crisis aka Asian Financial Crisis when the baht dropped 50 % in a week. All that’s missing is someone telling us how great Russia is doing.

        • Nick Kelly says:

          My comment was more abrupt than intended. However in 2020 the Mex Peso dropped from 71 cents Canadian to at one point a few months later 57 cents Canadian, the latter itself a second tier currency. This was not the Tequila crisis which was far more serious.
          When these runs on a third tier currency start they can become a crisis overnight.
          As the Fed tightens and more money flows into US $ assets the weaker currencies have to more than match the Fed.

    • Cytotoxic says:

      You’re more right than you know and for the funniest reasons. President AMLO of Mexico is an investor favorite (or at least was a few years ago) because of his ‘republican austerity’. He’s a socialist who cut spending. His socialism doesn’t make the false promise of plenitude but embraces the lean times his ideas cause. He passed those spending cuts and courts blocked (most of) his heinous anti-market ideas on energy and other sectors. The result was Mexico becoming an emerging-market darling, at least transiently.

    • Keppered says:

      Long Live the Libertad!

  4. Panamabob says:

    We might be at the point where that the famous can that has been kicked down the road by central bankers and politicians for a couple decades is so dented that it can’t roll any more. That can is full of debt that can’t ever be paid to support reality.

    • Panamabob says:

      I’ll add the can was never homogenized but hypothecated, re-hypothecated, derivitatized and finally digitalized. It might be likened to the crypto lending or NFT’s of today but an enduring legacy that will also be exposed some day or soon.

      • phleep says:

        A (real) financial instrument is, at bottom, a claim on some real asset. This became ridiculously gamed and distorted in stacks of shell-game “innovations.” What is innovated mostly is opacity and complexity. I think there may be whole realms of fantasy “assets” still out there, to unwind. Things like NFTs only pile on more (absurd) noise and distraction, more cotton-candy brain stimulation. Unwinding can be sudden — “smooth and efficient,” in a digital world.

        I am holding to my real assets, and my direct claims on them, and spending on actual things. It seems a move in the opposite direction against inflation. I guess I am too slow to “get it.”

    • NBay says:

      Have been aware of said famous can since 1980 and the Reagan-Puppet who’s script writers made the sport so wildly popular.

      It’s my metaphoric “belief” it is now just dust and is moved down the road with a leaf blower, with a fossil fuel motor, which is made in a non-union shop somewhere overseas.

  5. 2banana says:

    Does the ECB define a recession?

    “The ECB is now hiking into a recession, according to its own economic forecast.”

  6. James says:

    I’ve returned to Tokyo 6 weeks ago to be with my Japanese wife & even though the public here is veery much aware of the exchange rates of Yen to us $ & Euros & BPH etc…..the general public seems to be completely oblivious to the “bigger picture.”

    What’s the “bigger picture?”

    Everything that Wolf has been informing his readers for the last 2 YEARS!

    I believe that when the SHTF (which it will in greater or lesser degrees)
    the public in Nippon is going to be caught completely off guard wondering WTF?

    Sad, especially since they have been dazed since 1989 when I lived & worked here for 10 years!

    • Mojer says:

      I live in Thailand and I always say Asia is another world, they look with concern at those arriving in the Western world but their assessment is different and less schizophrenic and more optimistic, probably a matter of civilization.

      • JoshNYC says:

        To your point, the East generally relies less on debt than the West, and therefore interest rate increases are more abstract. The opposite is true for F/X, where the West is less concerned. To follow the thread, India follows the price of gold more closely than elsewhere. It all depends on what affects the population most directly, IMHO.

        • Wolf Richter says:

          “the East generally relies less on debt than the West,”


          China has a huge debt problem, including what the government calls “hidden debt” by local and provincial governments, and including corporate debt, such as by real estate developers that has been in slow-motion implosion for over a year amid various government efforts to bail it out, and including debts at state-controlled companies, which also got bailed out, and including increasingly debts that consumers took on to buy stuff, such as real estate that then blew up.

          Japan had a HUGE debt bubble that imploded in 1989, and from which it still has not fully recovered.

        • robert says:

          My personal motto: You will OWE nothing and be happy!

  7. Brian says:

    Do central banks have much choice in the matter? Hikes might mean more unemployment and recession, but “pivoting” means risking the end of economic and then political stability. We should be grateful they’re still serious about these things. It’s too bad not everyone is.

    • Mark says:

      “We should be grateful they’re still serious about these things”

      They’ve been counterfeiting for 25 years – they should be in jail.

      That would be a “serious” response to their actions. I’d be “grateful”.

  8. Whack A Mole Continues says:

    The devil went down to Georgia, he was lookin’ for a soul to steal
    He was in a bind ’cause he was way behind
    And he was willin’ to make a deal

  9. Harry Houndstooth says:

    Holding SQQQ and SRTY and happy.

  10. Finster says:

    Maybe it’s starting to dawn on stock market bulls that the Fed *wants* stock prices to go down. (Or at least not go up … there’s a new Fed call in town.) It doesn’t say that explicitly, but instead talks about “financial conditions” as a “transmission mechanism” for monetary policy.

    Not new at all … they been saying this for months, but the stock market didn’t want to hear it.

    • sunny129 says:


      Don’t disagree.
      But watch ‘front running’ almost everyday with the slightest of hint ‘ peak inflation, Fed will ultimately break some thing, pause, pivot and what not!
      There is a strong hopium that some how, things will be back to ‘normal’ kept alive by repeated positive narrative from the vested interests including Financial media and the Wall St.
      Mkts will remain very volatile between the power of perception vs reality.

  11. Concerned_guy says:

    ‘The ECB is now hiking into a recession, according to its own economic forecast. It expects this recession to be “relatively short-lived and shallow” starting this quarter. But it could get worse, according to ECB president Christine Lagarde, who added at the press conference that “risks to the economic growth outlook are on the downside, especially in the near term.” ‘

    I am trying to read between the lines here but not sure I can.

    These people have literally 100’s PHDS/well educated people in economics/business and the best forecasting models/softwares in the world.

    It is impossible that they don’t know if the recession is going to be short lived/shallow or deep and prolonged.

    • Halibut says:

      “It is impossible that they don’t know if the recession is going to be short lived/shallow or deep and prolonged.”

      I think it’s quite possible that they couldn’t forecast darkness at night.

    • Cold in the Midwest says:

      Ah, no. Not impossible by any means. The realities of the dismal science do not permit that level of accuracy. As William Sherdan stated in his excellent book The Fortune Sellers, “economic forecasters have routinely failed to foresee turning points in the economy: the coming of severe recessions, the start of recoveries, and periods of rapid increases or decreases in inflation.”

      Re-reading that 1998 book also reminded me of two observations about economic forecasting: 1) The first law of economics is for every economist, there is an equal and opposite economist; and 2) economists have called nine of the last five recessions.

      Wolf’s statement of “nothing goes to heck in a straight line” reflects those realities. Economic forecasting is imprecise at best. Each prediction brings its own biases with it.

      That said, do I think an upcoming recession is possible? Sure. But I’d be careful about reading too much into forecasts, regardless of the education level and seemingly impressive models of the forecaster. Each time around has differences.

      • Bobber says:

        The advanced education and experience unjustifiably increases the economists’ confidence level. I think some two year-olds have better awareness of their limitations.

      • NBay says:


        I think you hit it extremely well with “Econ Law Number One”.

        No need to expand on a gem such as that.

    • dougzero says:

      Economics first assumes “rational man” and moves on from there, which leaves the entire exercise on very shaky ground. They don’t know squat about the future.

      • Bobber says:

        I think they assume “rational man” in the short-term, but “stupid man” in the long-term. What would a rational man do when he realizes monetary policy has no end game, government debts are not serviceable at natural interest rates, and $1T-$2T deficits are scheduled for the foreseeable future? Only a stupid man will believe our monetary policy, based on Fed put and continual stimulus, works in the long-term. The only way out, aside from a severe recession, is a long period of elevated inflation.

    • Brian says:

      I studied some economics. Predicting an outcome is like predicting the weather: The best you can do is read the conditions, forecast based on past behavior, and hope to be right more than 1/2 the time.

      People are chaos just like weather. They’re predictable to some degree but can be affected dramatically (and unpredictably) by some “butterfly” if the conditions align.

      I also studied control systems. When I look the control mechanisms the Fed has, the wildness of the system, and the lag in the response, I think they’re doing a decent job overall. Not perfect, but decent.

      • Bobber says:

        Decent job? We’re looking at 20% inflation in three years, 2021 to 2023. What is your definition of “decent”?

        If my kids accidentally pour a gallon of milk on the floor, then put the cap on when they realize what happened, I don’t consider that a decent job. They need to fully mop up the floor.

        • Brian says:

          Financial crisis. Pandemic. Trump. All these things caused huge waves in the economy and yet the Fed managed to keep a pretty even keel. Is there a current problem? Yes. Should they have seen it coming? Probably. Is it due to the actions they took to deal with the previous crisis? Certainly. Should they have done something differently back then? Nobody knows. Should they have ignored those previous crisis to ensure no inflation today? Absolutely not. Are they taking care of it now? Yes.

          Not perfect. Decent.

        • Gattopardo says:

          That’s not what the Fed did. In a hurry, the Fed tried a milk glass from way up high, and spilled all over the place, and while it spilled they thought “mehhh, this will run out of milk soon, so the problem will fix itself.” And then they realized that milk jug was nearly full, and they eventually stopped pouring. Then they stared at the spilled milk for awhile, thinking about thinking about cleaning it up once the milk was running down into the HVAC vent. THAT’S not a decent job.

        • Bobber says:

          Brian, if you think 20%+ inflation in three years is “pretty even keel”, I think you have very low standards for monetary governance. You can’t even call what they did “experimental”, because the ending was known by all rational thinking persons.

        • sunny129 says:


          “Should they have done something differently back then? No body knows”

          How can they NOT?

          This is the same gang which brought us TWO boom-Bust cycles in this century. They created this 3rd largest ‘everything’ bubble as a cure to previous two!?

          The global banking structural problems which brought us GFC, NEVER got addressed! They just covered THEM with more debts!

          Only thing uttered in post 2008 was ‘ No one saw this coming’

          “Are they taking care of it now, yes’

          GOOD LUCK!

      • eg says:

        I think Brian is acknowledging that we live in a world of Knightian uncertainty, and that models (especially simplistic ones that rely on one lever) map very poorly onto complex human systems.

        • Bobber says:

          Complex? Printing money and deficits are basic concepts. Both are obviously harmful to the long-term health of the economy.

          Let’s not use “complexity” as an excuse. Our economic ills are the result of politics and lack of discipline, not complexity.

        • phillip jeffreys says:

          Concur with Bobber.

          Anyone with marginal economics background and familiarity with monetary history running back centuries could have guessed the outcome of sustained QE and NIRP/ZIRP – especially in a context of astronomical increases in Federal deficit spending . If the nitpick is the timeline, the relevant metric, when viewed from an inferential pov, is the margin of error (stnd error * significance level). One imagines there is some such metric in all the holy houses of high finance. In the event, most everyone has awareness of the excesses. You can see the light of an oncoming train at night. You might not be certain of its distance or how fast it is closing but you sure as H know to get the F off the tracks.

        • NBay says:

          Yeah, let’s completely ignore complexity and go for the good old black and white that produces no brain strain and a VERY crude (and useless) situational awareness.

          Ignorance IS bliss, right?

      • NBay says:

        I agree with Brian. Without help from good Fiscal Policy, the Fed is very limited.

        Congress has the power to Tax and Spend. Taxing hasn’t been tried for over 40 years…in fact it was reduced BIG TIME then, and has even been done since!

        What good is a “wealth effect” to an INDEBTED nation if it doesn’t also raise taxes to reduce debt?

        No. I DON’T like unrestricted unilateral CLASS WARFARE….it’s just not……democratic… all!

        • NBay says:

          I think have waited for that “trickle” long enough, in fact maybe irreversibly TOO LONG.
          We’ll all see for sure when more recession begins, I suspect.

    • Tom S. says:

      If you look at the dots from dec 21 you will see the fed envisioned a magical scenario where inflation would be above 2% for year but they could keep rates at 0.5-1%. I’m more of the belief the Fed is very acutely aware of the underlying economics in the US, but it is a highly politicized quasi-govt entity. What they know and what they do are 2 different things. Rates getting lowered while economy was humming along was a big goal of the former POTUS and even the current POTUS was fine with low rates until the entire populace started complaining about inflation as their number 1 issue. Then finally the Fed got the message it was time to tighten. What the fed knows and how they act are 2 different things. For example, listen to how the messaging changes depending on the need for the treasury to release a bunch of new debt to cover mammoth spending bills. It’s all interconnected.

  12. Depth Charge says:

    Now the pivot people have moved their pivot goalpost all the way into the 2nd quarter of 2023 after it never materialized this year, still calling Powell’s bluff with egg on their faces. While I don’t agree with Powell scaling back the rate of the hikes, I do enjoy watching him cut them off at the knees, slowly and methodically.

    Even more than that, I like Wolf’s titles to his articles, which must be excruciatingly painful for the pivot people. An air pocket in the DOW down to 28k in mere weeks would spread some good holiday cheer, in my opinion.

  13. SWE Josh says:

    Hi Wolf, in the past you have said you like it when we crowdsource the editing so you can make edits as people read these articles in the future so 1 quick thing is you aren’t consistent with your basis points. The hyphens are all over the place from “50 basis points” to “50-basis points” to “50-basis-points”. You also have a “75 basis points” and a “75-basis-point-hike”. Let me know if that’s not helpful info for the future (if you make the edit I will assume it was helpful) and I will avoid commenting on things like that. Delete this comment as needed.

    • Wolf Richter says:

      Here is the distinction and rule:

      1. “they hike 50 basis points”
      2. a “50-basis-point hike”.

      They’re very different, #1 not hyphenated, #2 hyphenated.

      For #2, the rule for phrasal adjectives applies: the phrase is hyphenated when a number of words together modify or describe a noun.

      I might forget to hyphenate #2 every now and then. But I just checked this article; looks like I didn’t forget any hyphenations were needed.

  14. ru82 says:

    Lacy Hunt has been calling for a big deflation for a year and a half year. It was supposed to start last fall. Boy, he sure was wrong.

    • curiouscat says:

      It may be late, but he’s not wrong.

      • SpencerG says:

        I doubt we will get deflation… as Wolf always says there have been only a couple of QUARTERS of deflation in our lifetimes. They are actually hard to produce in most parts of the world.

        But when a central bank says that it intends to “wring inflation out of the economy” it means that it is trying to get prices (and markets) to go sideways for a bit. Double Digit Inflation of the 1970s was replaced by 4% inflation of the 1980s, 3# inflation of the 1990s, and 2% inflation of the 2000s. I have little doubt that the Fed envisions creating another 40-year run like that.

        • Jon says:

          Home prices are going down.
          Is it not deflation for home prices?
          Same for auto prices.

        • ru82 says:

          Exactly….there has only been deflation a couple of times since the FEDs were formed. I think in the last 80 years there has been 4 to 6 quarters of deflation out of 240.

          The FED does not want high inflation but the will fight all they can to prevent any whiff of deflation. Just use 2009 and 2010 as examples and then all the QE that followed. That is their response to any type of deflation.

          Lacy Hunt is trying to fight the FED. He will lose.

          Even though the FED has reduced their balance sheet by over 300 Billion, the U.S. government deficit increased 300 billion. LOL.

        • sunny129 says:


          “I have little doubt that the Fed envisions creating another 40-year run like that.”

          If they were that smart, we wouldn’t be in this mess, to begin with.

      • phillip jeffreys says:

        Jon…nope. A snapshot answer would be that this is disinflation. The real answer is that it is supply/demand adjustment for housing. Deflation refers to the general price level of goods and services -specifically the value of money (hyphenetically speaking/posting!).

        • phillip jeffreys says:

          Forget everything after the hyphen. Value of money is inherent to inflation/deflation but secondary to the question you asked.

        • NBay says:

          I rest my case on dots being better………….than hyphens, but I forgot (/)’s….they are very good, too.

          What does get me is Harvard lawyers writing “etc” and saying
          I should really have used a hyphen there…..I admit it.

    • Bobber says:

      Lacy Hunt seems correct with regard to his analysis of long-term economic growth potential, but when recommending long-term bond investments, he assumes the Fed has the spine to tame inflation if and when it arises. I think that’s a bad assumption.

      I agree the economy has long-term growth potential of only 1-2%, but the Fed must create inflation of 3-5% over the long-term to support government deficit spending, reduced workforce participation, and maintain high debt levels, while avoiding a deep recession.

      For Hunt’s forecasts to be correct, the Fed must continue fighting inflation until it is down to 2%, then run inflation below 2% for many years to offset the 20-25% cumulative inflation that will occur during the 2020 to 2023 period. Do you really think the Fed has that much monetary discipline ? That’s what it would take to make Hunt’s forecasts accurate. Note, he was saying long-term bonds were a good investment back in 2020. They are down 40% right now.

  15. Mike R says:

    Data will clearly show that the Fed has been hiking (way too late as always ) right into the teeth of a recession, which began already in Q1 of 2022. The Philly feds jobs data already shows this. Versus the amply stupid establishment survey. Off by more than 1 million jobs for Q1. Q2 will be worse. Q3 will show we have been clueless. But we won’t see this for months in the revised data.

    • American Dream says:

      Stop it

    • Lune says:

      Are you kidding? In q1 companies were complaining they couldn’t find workers and people were quitting to hop to better paying ones.

      While the details of exactly how many jobs are available, etc might be off, certainly you don’t think this is anything but a tight labor market even now, nevermind in q1 2022??

    • Wolf Richter says:

      Mike R,

      These benchmark revisions take place every year. The BLS adjusts its figures every year with these benchmark revisions, sometimes up sometimes down. The Philadelphia Fed attempts to estimate those revisions on a quarterly basis. They’re an estimate of future benchmark revisions.

      I posted the Philly Fed text in a comment in the prior article. Read it. You’re just citing a ZH headline here.

  16. CRV says:

    As i see it:
    The western-block countries feel forced to raise their rates, because the BRICS-block poses a threat. When dollars and euro’s are going to be dumped, because they are no longer needed for BRICS trade settlement, they will come home and cause more inflation there. These currencies therefore have to be made more attractive to hold. Higher interest rates might do something positive in that area.
    So they are fighting inflation. Not the current one as it makes no sense to cause a recession and misery to just fight price rises. But the one that could come in the future. Then the recession is just collateral damage necessary to save the system.

    The SNB doesn’t want to hold too much foreign currencies for the same threat. They have no control over the rates on the currencies they hold.

    The Mexicans only have to look to their northerly neighbour to see what is wise to do.

    • Mr. House says:

      Ah finally someone gets it!

    • Wolf Richter says:


      I hate to tell you this, because I don’t want to destroy your sweet illusions, but three of the four BRICs countries imposed big rate hikes. China is the only exception, and China is dealing with the collapse of its real estate development & construction industry which had been a huge contributor to GDP.

    • sunny129 says:


      “When dollars and euro’s are going to be dumped..”

      And replaced with what?
      Yuan? Ruble?

      How are the ‘ final trades’ with Petro Yuan or Petro-Rubel settled without a common denominator like $, Euro or Gold?

      Which Country ready to assume the role of US$ and USA in the global commerce with trade deficit?

      USA is the largest consumer mkt while the rest of the countries want to be ‘export’ oriented and unwilling to have a large trade deficit?

  17. LordSunbeamTheThird says:

    Are they hiking into a recession? Or are they causing a recession with hikes? As that is the usual plan because you lower inflation with unemployment.

    “Rising unemployment and the recession have been the price that we have had to pay to get inflation down, That price is well worth paying.”

    Chancellor of the UK Exchequer, Norman Lamont, May 1991.
    (n.b. the curious use of “we”)

    • Mr. House says:

      The recession began in 2019, they papered over it in 2020. 2020 was the BRICS and others telling us no more of the BS you’ve been doing the last 20 years while you lecture everyone. Why do you think the Ukraine is SOOOOO important? Its the final showdown, the world is watching, and whoever ends up winning will set the tone for the coming decades. The rest of the world is looking and wondering, will the Russians continue to throw mud in the eye of the imperial empire?

      • Cytotoxic says:

        LOL the Russians are the wannabe imperial empire, and they’ve lost.

        The BRICS are in no place to dictate or issue ultimatums. As bad the establishment west is-and I hate it-the BRICS are all that and worse. China has done far more to damage itself than anyone else could have. Russia’s done. India isn’t delivering. Brazil chose the greater of two evils.

        • Mr. House says:

          Time will tell, you read the trends your way and i’ll read them mine. Happy Friday!

    • Wolf Richter says:


      It doesn’t matter. They need to get inflation under control, and to do that, you tighten policy in order to lower demand, which generally causes a recession, which may or may not bring inflation under control.

      But a mild short recession isn’t going to do much to bring 10% inflation back to 2%, after years of money-printing and NIRP. Once this fire takes off, it will burn through any excess monetary fuel before it subsides – and there’s a huge amount of monetary fuel all over the place, after 14 years of QE.

      • Bobber says:

        If the Fed wants true credibility, they will not only bring inflation down to 2%, they will run below 2% for a decade or more to offset the 2021/2022/2023 inflationary spike. That would likely mean holding interest rates high for a decade or more. Asset prices would revert to a long-term average, about 50% lower. OUCH!

        The Fed said it will target 2% inflation over time. Let’s see if they have the credibility to follow through on it. My guess is they will take that pledge back, in true Dove fashion.

        • ru82 says:

          Not arguing your point but I don’t think they will let asset prices fall 50%. That would cause a lot of bankruptcies because people would walk away from their debt payments….and there would be bankruptcies.

          There are a lot of Boomers that barely have enough right now for retirements. 50% asset correction would put millions into the poor house and then the Government would need to increase entitlements by at least 1 trillion.

          The FEDS want 2% inflation. The key term here is inflation. They always want inflation. Never deflation.

          The CBO says Government debt will hit $40 trillion in 2030. That is 10 trillion more than they have now. Nothing deflationary about that.

        • Augustus Frost says:

          The long-term average is inflated by the mania. 50% lower is SPX 2000, not remotely reasonable.

        • Pea Sea says:

          “I don’t think they will let asset prices fall 50%. That would cause a lot of bankruptcies because people would walk away from their debt payments”

          Some of them should.

          “….and there would be bankruptcies.”

          There should be bankruptcies.

          “There are a lot of Boomers that barely have enough right now for retirements”

          If they barely have enough right now, after the astronomical appreciation of their assets in the last three years, then they were never ready in the first place.

    • eg says:

      Thank you, LordSunbeam! Now I know where Madeline Albright got that phrase! I’m not sure which usage of it, hers or Lamont’s, was more despicable.

  18. Analysts Are Baiting The Fed says:

    What is the deal with banks, brokerage houses and Wall Street in general now openly baiting the Fed like a bunch of cheap sell-side stock analysts?

    Witness this quote yesterday from a CNBC article — CNBC being of course the single biggest PIVOT PIMP (Wolf you can Venmo me a bonus for coining this great new term) :

    “The tug-of-war between the Fed and the markets is squarely on the market’s side: the slowdown is not ‘transitory,’ and the Fed will be forced to act before 2024,” Quincy Krosby, chief global strategist at LPL Financial, wrote Thursday.

    Just because CNBC, WSJ et al keep jawboning for a pivot does not mean it will happen. OTOH, even Powell himself has admitted that there is not uniformity among FOMC members about continuing to march forward.

    So my guess is that people like Krosby and the rest of the CNBC crowd think that if they continue to “work the refs,” the wall will crack and they can get the Fed to ease off?

    This worries me. Personally, as an old guy who just retired, a hard landing would be much better for me than no landing at all.

    What thinketh Wolf?

    • Wolf Richter says:

      This whole thing is so funny. During QE and 0% era, the motto on Wall Street was “Don’t Fight the Fed.” Meaning: buy, buy, buy! Now the motto on Wall Street is: “Fight the Fed.” meaning Buy, buy. buy!

      The Fed is going to win.

      • Don says:

        I suppose at some point in Mortimer’s theater of the absurd it’ll be sell, sell, sell! Turn the machines on!

    • Cytotoxic says:

      There’s no plot, no working the refs. There’s an ingrained culture and mentality born of decades of monetary lassitude-predating QE-and a desire to stick it to those jerks who think we can’t just have it all for free. To be cleverer than thou. They will learn the hard way.

  19. ANDY says:

    How is it that the Fed DESTROYS money through QT? The Fed purchases US Bonds via payment of money which remains in the hands of the seller of the bond. When the Fed allows the expiration/roll off of said bonds, the Fed doesn’t get paid or get money from anyone. Conversely, if you’re going to claim that the Fed gets money from the US Treasury, the Fed is obligated to return said monies back to the US Treasury anyway. What gives? Greetings from Frankfurt.

    • Wolf Richter says:


      Use your brain for about 3 seconds and ask: How did the Fed pay for those QE bonds that it bought?

      Answer: with money it created for that purpose.

      Now use your brain for another 3 second, and ask: what happens to the money after the Fed gets paid for bond (QT)?

      Answer: the opposite of what happened when it was created under QE. It just disappears.

      The process work through debts and credits in the primary dealers’ reserve accounts at the Fed.

      • schmoe says:

        The purchase of bonds just converts the seller’s asset portfolio from bond holdings to cash holdings.
        Is the point that the seller then buys other bonds, which raises bond prices (and lowers rates), or buys stocks?

        • Wolf Richter says:

          READ WHAT I SAID.

          The Fed CREATES MONEY to buy these bonds. The Fed is a buyer with newly created money that shows up out of nowhere and buys those bonds and thereby HANDS THIS NEWLY CREATED MONEY TO THE SELLER (broker-dealer) that then uses THIS NEWLY CREATED MONEY to buy something else.

          If the seller sells to me (instead of to the Fed), I have to sell something or cash out of something and someone else has to give me this cash to have the funds to buy those bonds. That’s the kind of chain of exchange that you’re describing. But that’s not what happens when the Fed buys.

  20. Ian says:

    That would be a transitory recession then according to the oracle Lagarde. Sounds like something else, can’t quite put my finger on it.

  21. Kevin W says:

    Reasonable people might ask themselves, “Just how does LaGarde still have a job?” And how did it happen that the Bank of Mexico has been acting with more prudence and foresight than any of their peers in the so-called developed world?

    • Depth Charge says:

      This is the major problem with the entire system – a complete lack of accountability. Politicians and unelected bureaucrats fail upwards. There is almost no such thing as getting fired. The system is completely rigged from top to bottom by the people running it, to solely benefit themselves at the expense of society.

      In a fair and just world, Jerome Powell and the entire FED board would have been fired and arrested for the insider trading scandal alone, not even taking into account their financial crimes against humanity that they’ve been waging for over 20 years.

      • eg says:

        The European Parliament is Exhibit A of your thesis, Depth Charge — it’s loaded with grifters and local political embarrassments who got “kicked upstairs” from their national politics.

        The most recent Qatar scandal is just the tip of their iceberg of corruption.

        • sunny129 says:


          The un-elected Euro commission ( and also Euro Council) is more powerful and calling the shots than so called’ the elected’ Eu parliament. The latter is a gravy train for the politicians

  22. Michael Engel says:

    Japan have very friendly neighbors : China, Russia and N Korea. Japan doubled it’s defense budget from 1% to 2%. Japan own a diamond necklace with : US, Australia and India and UK in response to China Pearl necklace with six 6mm pearls, without a knot.

    • Prairie Rider says:

      Thanks Michael, now I have ZZ Top spinning in my mind.

      And to Whack A Mole Continues, that song also came to mind on Friday, 11 November as I listened to Joshua Bell playing his fiddle (a Stradivarius) with the St Paul Chamber Orchestra.

      Michael, how would you rate Mr. Bell?

  23. Jdog says:

    It is kind of amusing to watch all this. Those of us who have been around long enough to remember the term “whipsaw” understand that the market lemmings are going to continue to get jerked in one direction and then another until the event comes along that will cause them to panic and follow each other right off the cliff… When your investing is not based on sound fundamentals, then there is no foundation that secures staying power. Scared money always make for bad decisions. Darwinism also applies to economics.

    • sunny129 says:


      ” When your investing is not based on sound fundamentals, then there is no foundation that secures staying power.”

      This has been the case, from the very beginning since March of ’09. This surreal bull mkt built with ‘easy-peasy’ money created by insane credit creation.

    • NBay says:

      Yes Jdog,
      Economics does in fact evolve. Our notions of it are quite different than, say, the Sumerians.

  24. Wolf Richter says:


    No. Read my reply to your first comment. You completely don’t understand the mechanics of QE and QT.

    If you want to get a headache this weekend, let me know and I will link here an article by the New York Fed (which does the QE/QT stuff) about the mechanics of it. I gave you the simple, easily digestible 2-liner version.

    • Rosarito Dave says:

      Andy, do not take Wolf up on his offer to send you the link… If you are like me… And believe you have a decent background in accounting and financing and choose to follow, the article, Wolf does speak the truth, and it is mind numbing. But your mileage may vary.

  25. gametv says:

    That ECB asset dump looks to be happening at a faster pace than the Fed.

    There are two ways to look at assets on the balance sheet and the future. One way is to decide that you want to conquer inflation by raising interest rates and allow the maturing debt to roll off the balance sheet, so that you dont need to take big principle losses on the portfolio.

    The other way is to not raise interest rates too fast and sell as much of the balance sheet assets as quickly as possible. A central bank would do this if it believed that inflation is not going away for many decades and that interest rates will have to go much higher, therefore, the best policy is to get rid of the balance sheet at the lowest possible loss, which means selling it off NOW!

    Let’s just imagine for a second that we are in for sticky inflation and it is going to look like the 1970’s, where it drops and then rears its ugly head again. The Federal Reserve could be sitting on an unrealized loss of multiple trillions of dollars, as the market for Treasuries goes into a free-fall.

    The central banks have created a huge amount of uncertainty.

    Now, I seriously doubt that we are in for 1970’s inflation. But the stickiness of inflation is really something we have no clue about. The Fed got it all wrong so far, why do we think they have a clue about the future?

  26. Citizen AllenM says:

    So now the SNB to manage it’s exposure is now playing a giant game of Margin Call with first world markets. And it’s goal is to sterilize any massive inflows to the SNB by having massive cash to be able to offset flight to Zurich.

    Sell it all, and get out now. Ugh.

    • dang says:

      The SNB of course stands for the Swiss National Bank who are currently, competitive, according to the prescribed protocol established by the Bretton Woods Agreement that defined the rules defining the relationship between the US dollar and all the other fiat currencies, including the Swiss currency.

      • dang says:

        I’m not so naive that I would trust what an SNB official told me without varifyiing it, if that were my job.

        My opinion is that the Euro is at much higher risk than the reserve currency, the dollar.

  27. Citizen AllenM says:

    Now, just in case you think my call of Margin Call is crazy, just look at the US Treasury 2020 5/15/2050 bond. Sold just two years ago at a paltry interest rate- now trading at 59 cents on the dollar. Yup. You can buy it now for 59 cents. A huge discount, and one that can indeed grow wider.

    Asset prices that still reflect that peak are most likely overpriced to a significant amount (looking at houses and everything else that is priced using Black Scholes….)

    But losing 41 cents in base value in 30 months is crazy…..but the next 41 cents could be even more devastating.

    Cash is going to be king- as I just pointed out the SNB is a first mover…and they are selling assets for what? Ultimately Swiss Francs they can then put back under the mattress for when Europe has no liquidity.

    Someday this war’s gonna end…

    • Bobber says:

      Through an insane money printing policy, the Fed forced real interest rates negative and held them there for years, like a multi-year helicopter drop of money. Crazy policy leads to crazy results.

    • dang says:

      The only thing we can be sure of is Social Security, unless the corporate raider, evil bishop, Mitt Romney, gets ahold of the reigns, which would destroy it.

  28. eg says:

    Adam Tooze raises the question whether anyone is minding the global economic store given the potential synergies as all these central banks tighten in unison. I think the “soft landing” crowd is delusional.

  29. It is very dangerous to assume that daily equity price movements are “interpreting” anything. That is the day trader’s delusion. The only sane (and lucrative) way to invest in the stock market is for the long term.

    All of this Fed speculation is blather. So is all of the Fed and ECB jaw-boning. What matters is not what comes out of peoples’ mouths, but what ACTIONS they take in life. Same applies to the Fed. The true test for the Fed and ECB will be when the next financial panic hits or their respective economies go into severe recession. That will be the time to decide how “hawkish” these central banks REALLY are. Time will tell.

    My opinion remains that ultimately they will fold. They will adjust their acceptable level of inflation to 4% or higher. There are ALREADY voices advocating for that. Lael Brainard has already started making whining noises about being too aggressive with rate hikes. Same with the ECB. The former vice chair is already complaining about “over-tightening”. Those voices will become MUCH louder when the doodoo hits the fan.

    So, stop all of this Fed watching and focus on the long term. In the long term, inflation will continue and governments will meddle. Fiscal deficits will continue. Monetary debasement will continue. Such is the nature of life.

    • Wolf Richter says:

      “raising the inflation target”???

      You need to think this through a little. You seem to be clueless about what that would do.

      If the inflation target is raised to 4%, and CPI inflation is somewhere above 4%, the 10-year yield will instantly go to 6%, mortgages to 8%, and they will stay there or go higher, and asset prices will plunge to adjust for the higher yields, including stock prices.

      The ONLY thing that is keeping long-term yields low and prices from crashing now is the hope that 2% inflation will be back soon.

      Raising the inflation target means higher inflation in the long run, and long-term rates and yields WILL GO UP. Higher yields = LOWER PRICES across the board.

      Raising the inflation target will perform a rug-pull under asset prices. So go ahead, make my day!

      • sunny129 says:


        “The ONLY thing that is keeping long-term yields low and prices from crashing now is the hope that 2% inflation will be back soon”

        Is this hope (?) realistic, considering the record levels of global debt(s)? USA debt to GDP over 130% conservatively.

        Total global Debt to GDP is over 400% ( -Nouriel Rubini

      • eric says:

        But the ground is being prepped:

        • Wolf Richter says:

          No it’s not. Bernanke posts his opinion stuff there, and the Fed has been doing the opposite of what he says in those pieces. Lots of opinion stuff gets posted there. It’s just like a hobby for some people who have run out of things to do.

          There is nothing new about raising the inflation target. The moment it was set at 2%, there have been opinion pieces like this why it should be moved to 4%.

          People need to realize, a higher inflation target = HIGHER LONG-TERM INTEREST RATES, HIGHER YIELDS, AND LOWER ASSET PRICES. That’s why this is a very unpalatable proposition. Right now, it would be like a rug-pull under asset prices. Fine with me. Bring it on.

    • sunny129 says:

      The longer view

      “The only sane (and lucrative) way to invest in the stock market is for the long term”

      In the long term, we all are dead.

      Study the mkts between 1967 and 1982
      DJIA was(’67) 1000 went down and didn’t recuperate until ’82 – 18 years!
      Imagine a retiree starting at the beginning of ’67!?

  30. dang says:

    the opening sentence; ” On Thursday, the S&P 500 Index dropped 2.5%. “, underlines the monotony of watching the choreagraphed implosion of the Fed’s financial bubble.

    It is an economic plan which means it is a game plan.

    The stock market gained 15% or so since mid Oct. Profit taking only reduced the index by 2.5 pct should be celebrated as market testosterone. Perhaps.

    • dang says:

      My problem with the economic plan approach, which focuses the fundamental inputs in a manner that ensures the goals of the economic plan are met. In the current case, as in most previous cases, the rate of controlled implosion allows the gamblers to lay off their losses on the vulnerable population.

      Concentrating wealth, which has always been anathema to the American philosophy of freedom.

      • dang says:

        I’m old enough to have known several veterans from the War to End All Wars, WW1 who said that it was a miserable quagmire of suffering.

        • dang says:

          Older people, often get emotional about the battles that were won or lost. Thank goodness that the younger generations judge it as old age and carry this delicate world into the next epoch. The Doors were my go to music.

        • dang says:

          Glory was the last thing they felt at the time but became pertinent later on.

    • dang says:

      Well, perhaps, your comment ” The ONLY thing that is keeping long-term yields low and prices from crashing now is the hope that 2% inflation will be back soon.

      Hope ? come on. Personally, I think the reason is much more sophisticated than hope. The Federal Reserve is in the process of trying to manage the simultaneous deflation of the Financial bubbles they inflated.

      • Dang says:

        There is a reason that the so called, financial ” free markets” aren’t convulsing.

        I often entertain the wrongful thought that, perhaps, this market is rigged.

        • dang says:

          There is always, given the poor batting average of historical humanity, a possibility. That I may be wrong in my suggestion of a problem with corruption in the kernel of our future.

        • dang says:

          When I was day trading, made a million and a half and lost the same. There was a dark winter day that convinced me that I was betting against the house.

          The probability that I would end up broke became risible.

          I don’t mean to clutter up this good site by shooting my mouth off.

  31. Rico says:

    MEMO: Don’t fight the Fed

Comments are closed.