Is Inflation or Recession Driving the Market?

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In the Trolley Car Problem – The Fed’s Predicament, I laid out how the Fed will likely choose to fight inflation at the expense of triggering a recession:

Jerome Powell can tackle inflation but risk a recession and lower stock prices. Or he can try to avoid a recession and risk persistently high inflation.

On May 4, 2022, the FOMC policy statement stated, “the committee is highly attentive to inflation risks.” Additional comments from Jerome Powell’s post-FOMC press conference warned the Fed was choosing to tame inflation even if it put the economy in a recession.

Some investors were paying attention to the changes in the Fed’s tone on May 4th and the hawkish anti-inflation rhetoric in the following weeks. They sensed the Fed decided how to handle their trolley car problem.