Markets are a tiny facet of society, but because they are molded by mass psychology, they are a good barometer. They only function when people have faith in them, and this faith is based on the belief that leadership knows what it’s doing and can govern wisely. “If that belief fades,” wrote George Goodman in The Money Game, “then so do the markets. They do not merely dive; they dive and then they disappear.”

Almost half of credit investors polled by Bank of America indicated that a Fed policy mistake is their biggest fear. Investors believe that entrenched inflation will put an end to the era of central bank predictability, with upcoming rate hikes being quicker, greater, and more chaotic than in the past.

Does the Fed know what it’s doing?

After projecting three quarter-percentage-point rate rises this year, most Fed officials have penciled in at least three more rate increases in 2023 and two more in 2024. Fed Funds futures have essentially locked in a rate hike at the March meeting and priced in four rate hikes through 2022. Fed chair Jerome Powell said the Fed will stop buying assets in March, as planned, and could start to shrink its balance sheet later this year. 

Policymaking in view of the world necessitates a certain practical humility. The market is almost always wrong about what the Fed will do. And it turns out, the Fed’s own best guesses, the so-called “dot-plot,” isn’t much better.