Central banks could screw it up through aggressive monetary policy

Don't let the feel-good vibes that kicked off markets in the fourth quarter lead you astray: The Federal Reserve and other central banks could screw it up through aggressive monetary policy.

In a new note to clients, Marko Kolanovic, a top JPMorgan strategist, wrote that we are increasingly worried about central banks making a policy error and of new geopolitical tail risks. The likelihood of central banks committing a policy mistake with negative global consequences has increased, and this started to show up in various cracks in FX and rates markets, given the recent escalation in hawkish rhetoric. A delay will likely be introduced for the global market and economic recovery even if a mistake is avoided. The Federal Reserve is the straw that stirs the drink in global markets as it continues to push out inflation by aggressively hiking interest rates, which has set the pace for other central banks. The mission was reinforced in the past week by hawkish commentary from various Fed officials, including Fed Chair Jerome Powell and Vice Chair Lael Brainard.

The Fed has been hawkish about its tone in a wide range of asset markets, from the rising U.S. dollar to rising mortgage rates nearing 7%.

The Dow Jones Industrial Average DJI S&P 500 GSPC and Nasdaq Composite IXIC are mired in double-digit percentage declines for the year despite strong rallies in the first two trading days of October. Emerging markets are under considerable pressure as investors wait for the next shoe to drop from central bankers.

Increasing interest rates have also begun to factor into outlooks from corporate America, notably large multinationals, such as Nike NKE, which are exposed to currency market volatility.

Wall Street pros are keeping an eye on the Fed's interest rate policy.

The Fed is tightening, inflation doesn't come down as they want, and they need to go a lot further than they do now, according to Paul Gruenwald, chief economist at S&P Global Ratings chief, warned on Yahoo Finance Live.

Gruenwald added that scenario has a low probability, but it still presents a risk to markets.

The economist said that when that goes into the market and gets repriced, they're going to have to put on the brakes.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Sozzi follows BrianSozzi on Twitter and LinkedIn.