DE | U.S. and Global Economy and Markets | Correction! Inflation, Fed, Russia – 2/24/22

Posted February 24, 2022 by rvillareal

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Correction—Inflation, The Fed, Rising Interest Rates, Geopolitical Risk, Inflation, Fed and Higher Interest Rates
Surprisingly high CPI price inflation in January (released Thurs., Feb. 10) triggered increased uncertainty over how much Federal Reserve Tightening, how soon, and how high short-term interest rates might go.
Sharply rising interest rates have been the source of an ongoing stock market Correction, huge volatility, fundamental portfolio shifts and equities repricing lower in response to higher interest rates.
Higher interest rates suggest lower valuations for stocks; hence, while the uncertainty goes on, a stock market Correction goes on, perhaps with equity price downside to as much as 10%-to-15% below the previous high for the S&P 500 Index. How long always is difficult to calibrate since Corrections typically reflect short-term risks that do not become long-run realities. A Correction can last anywhere from hours, a day-or-so, to weeks, and sometimes months.
This time, in addition, the Russian invasion and annexation of east Ukraine and what might be next, a Geopolitical Uncertainty, with lots of unknowns in the uncertain politics of Russia, an inscrutable President Putin, and potential negative economic and inflationary Shocks to the Eurozone, Eastern Europe, U.K., U.S. and other economies, is intensifying and extending the Correction. Crude oil and gas shortages in Europe and the Global Economy will worsen inflation, bring more Fed and interest rate angst, uncertainty on the Federal Reserve response, and/or unexpected economy weakness.
Russia is the third largest supplier of crude oil behind the U.S. and Saudi Arabia, in a War cutting back on crude oil production or because of West sanctions shutting down gas pipelines to Germany and Europe, in general. Further rises of inflation, already way too high, would hurt purchasing power and economies on a negative supply-side Shock of the 1970s variety. This risk is now part of the Correction, with its upside cost-push inflationary possibilities and central bank tightening is of financial market significance.