The Tell: Markets Risk A Brutal Fall As They Ignore The Feds Latest Warning Shot

Markets find themselves in a tough spot, according to the Wolf Street financial blog’s Wolf Richter.

Richter is focused on a warning shot fired late Thursday by the New York Federal Reserve’s William Dudley.

The salvo from Dudley came in the same week as the inflation-obsessed Fed got a fresh reading on consumer prices.

Dudley said the U.S. central bank may have to “press harder on the brakes” at some point over the next few years, increasing the risk of a hard landing for the economy.

“It was a shot before the bow — one of many — for the markets to start paying attention to the Fed,” writes Richter, whose take served as a call of the day for our Need to Know column on Friday.

“Monetary policies have no impact unless markets believe in them, react to them and thus effectively implement them. But this might be a lot to ask, after the Fed has spent years methodically and thoroughly destroying its own credibility by flip-flopping wildly at every market squiggle,” he adds.

The big risk, Richter reckons, is that markets SPX, +0.67%  will go overboard when they finally react.

“If I read Dudley’s words correctly, he is worried that markets will fall in line too late, and only after the Fed has fired some big guns to get their attention, and then it might happen all at once,” the Wolf Street writer says. “The sudden adjustment in prices, yields, spreads, risk premiums, etc. might be too brutal for the economy to digest.”

Go here to read Richter’s full post — and here for Dudley’s full speech.

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