(Wisdomtree-Professor Siegel’s Weekly Commentary, 06/13/22):  Two Fridays ago, I suggested Powell abandon the slow and deliberate 50 basis point rate increase pace to move rate hikes forward to take control of the narrative. By last Monday morning expectations moved to a 75 basis point hike, which the Fed delivered on.

Now, while the Fed is appropriately confronting inflation, we face a rapidly slowing economy. All the economic data are slowing, highlighted by a terrible retail sales figure that came out last Wednesday. It is almost certain GDP growth will now come in negative for the first half of 2022.

Usually, a standard definition of recession is two consecutive quarters of negative GDP growth and we are almost certain to have negative GDP growth on average over the first two quarters of 2022. I would describe the current economic conditions as a ‘mild recession’ and certainly the market volatility last week showed worries of further deteriorating conditions.

The slow down concerns showed in cyclical commodity prices, both oil and wholesale gas prices were down considerably last week. Broad commodity indexes are down 7% from their highs. Over the last few weeks, growth indexes out-performed value indexes on fears of this economic slow down, which favors more secular growth stories over value companies that are more sensitive to the business cycle.

I have been talking about the M2 money supply as a key indicator of inflation. I also check on weekly commercial bank deposits and that weekly data shows money supply growth has been flat over the last 3 months, which indicates the slowdown in the economy is here.

While I have been among the most hawkish forecasters for the Fed to date, my read of the economic slowdown means we may not get another 75 basis points in July—we may not even get another 50 basis points if the data continue to weaken sharply. Just the expectation of tightening alone has created a real impact on actual tightening of financial conditions.

The 10-year TIPS yield—the real after inflation rates—had reached as high as 80 basis points last week and settled at 65 basis points on Friday. This is above where I see the equilibrium real rates as I see this yield oscillating in a range of +50 to -50 basis points over longer horizon.

The adjustment to the stock prices from discount rates rising has now taken place. The Fed must continue hiking rates. The December Fed Funds Futures is now pricing in Fed Funds at 340 (another 7 hikes over the final 4 meetings of the year), but they may not have to go as quick as many now presume.

Earnings for 2022 have come in relatively strong given the economic slowdown we are seeing. This will become a key question for the markets looking ahead, as I have said earnings can deliver on growth. That is still my baseline belief, but this will be the key to watch.