The S&P 500 index eked out a gain of 0.22 points in May following a brutal 7-week selloff primarily due to the massive mistake by the Federal Reserve that let the inflation genie out of the bottle. As a result, the Fed has done enormous damage to its credibility and reputation, and markets reacted accordingly.
While we have written extensively about Federal Reserve mistakes in the past, the Fed compounded its mistake by increasing interest rates only 25 basis points (0.25%) in March, and continued to purchase bonds despite inflation running at a 40-year high. Moreover, less than one week following the March Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell emphasized the need to raise interest rates “expeditiously,” seemingly unaware of the fact that the Fed could have done so the previous week, not to mention months earlier.
The significant gap between what the Fed said they would do and what they did has caused confidence to evaporate.
To be clear, the Russia war with Ukraine has added to price pressures including substantially higher oil and gas, wheat, and fertilizer prices. And U.S. policy regarding domestic fossil fuel production has essentially created a self-inflicted oil embargo. Nevertheless, the Consumer Price Index was 7 percent in December, before the Russia/Ukraine war, and roughly 8 percent before the Fed raised interest rates.