(Bloomberg). — The Federal Reserve is now more cautious than ever with rising interest rates and plummeting stock prices. This time, it is not necessary to expect such a surrender.

Financial conditions, a multi-input measure of nervousness across equity and fixed-income markets, have constricted to roughly the same levels they reached at the height of the central bank’s last tightening campaign, at Christmas 2018, a Bloomberg measure shows. With a market that was just pointing towards a bear, Fed Chair Jerome Powell realized enough was enough, and cut rates.

Four years later and with inflation at its worst, the world has changed drastically. That was clear on Tuesday, when Cleveland Fed President Loretta Mester said, after the first half-point rate rise in 22 years, policy makers can’t rule out even bigger boosts in the future to bring inflation under control. Fed Governor Christopher Waller came next, describing the labor market as “overstimulated” and reiterating Powell’s view that the economy can stand higher rates.

This is the message to investors. As bad as things have been in markets and for increasing number of corporate debtors, and as tight as they’re threatening to make things for the economy, it would trouble policy makers little if things got worse. These moves may actually help to make up the time they didn’t start shifting policy earlier. 

“The Fed is really happy financial conditions are tight,” said George Pearkes, global macro strategist at Bespoke Investment Group. “They would way rather the market do the moving for them and then not deliver on tightening. That’s being ahead rather than behind the curve, as it were. That appears to be the most likely scenario right now.”

Barring a “complete meltdown” in US stocks or credit, it’s highly unlikely the Fed will ease up on inflation, according to BMO Capital Markets. 

Volatility was triggered by Wednesday’s report. The 0.6% gain in the core measure of consumer prices in April from the previous month — bigger than all forecasts in Bloomberg’s survey — wiped out a gain in and sent two-year yield soaring as investors boosted bets on further Fed policy tightening.

“Given how much of a political hot-button issue inflation has become, the odds are low that the Fed will take its foot off the brakes before the midterm elections,” BMO strategist Ian Lyngen wrote in a note Tuesday. Republicans have sought to make the surge in living costs a top issue in November’s congressional ballots.

Right now, market turmoil is merely a means to the Fed’s ends. Tech-based economies have fallen more than 24% since this year. The decline was caused by a bond sale that saw the 10-year Treasury yields drop to 3.2% on Monday. Credit market pressure is evident, as high-yield yield premiums have reached their highest levels since November 2020.

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Tighter financial conditions have an impact on stock prices that goes beyond the stock market. Jefferies LLC reports that initial public offerings (IPOs) and corporate-credit issuances have been slowing as funding costs rise.

Still, no Fed official who’s spoken since the May 4 policy meeting has expressed concern about the market volatility or the state of the US economy. 

For her part, Treasury Secretary Janet Yellen, came close to endorsing the dollar’s climb toward 2020 crisis-level highs. The greenback is being pushed higher by rising US rates, “and in a way that’s part of how a tighter monetary policy works,” the former Fed chair said last Wednesday. On Tuesday, New York Fed President John Williams that the US unemployment rate could climb from the current 3.6%, it wouldn’t be “in a huge way.”

Citigroup Inc (NYSE:). economists warned against any conclusion that Fed policy makers are currently hitting their peak hawkishness, as strategists from JPMorgan Chase & Co. (NYSE:) have suggested. There’s a potential for a ramp-up in the so-called terminal rate — the endpoint for the policy benchmark for the cycle. 

Still awaiting Peak

That might not come until September, if core inflation proves sticky and it’s evident the central bank has significantly more work to do, the bank’s team wrote in a Tuesday note. Two more 50-basis point hikes are expected by the Fed at its next meeting, Swaps Pricing shows.

“Financial conditions have tightened rapidly, causing some to speculate that we are at the moment of ‘peak hawkishness,”’ Citigroup economists led by Andrew Hollenhorst wrote. “That is a possible outcome, but not a likely one given the trajectory of inflation,” they wrote. “We continue to see risks as balanced toward a further hawkish move from the Fed.”

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