The Fed's dovish-hawkish game with the nation's monetary policy may set markets up for another crash. It happened before during Alan Greenspan's term with the Fed, and it may happen again during Jerome Powell's tenure, as this game catches too many traders on the wrong side of the market and forces them to liquidate their positions.

Anyone following the Federal Open Market Operation Committee meetings, which design the nation's monetary policy, in the last couple of years should have noticed an inconsistency in how the Fed approached the spike of inflation, swinging back and forth between dovish and hawkish positions. For instance, a couple of years ago, the Fed talked about inflation being a "transitory" problem caused by temporary supply chain bottlenecks.

Therefore, it saw no need to change the ultra-accommodative monetary policy it launched during the pandemic recession.

Fed's dovish approach to inflation set Wall Street up for a big rally, which spread across all asset categories, with bitcoin approaching $70,000. The rally included meme stocks, which reached stratospheric valuations, as they were enough speculators with sufficient cash to chase after their shares.

Meanwhile, low-interest rates added fuel to the hot housing market, with home prices reaching new highs, pricing low-income Americans out of the market.

Unfortunately, things didn't turn that way for the nation's central bank. Inflation didn't go away any time soon by itself. Instead, it stayed around to this day, gaining momentum month after month. Price hikes showed at the local supermarket and the neighborhood gas station, climbing to levels Americans have not seen since the late 1970s and the early 1980s. Then, the Fed decided to abandon its ultra-accommodative policy by tapering its bond-buying program first and then hiking short-term interest rates, catching some traders and speculators on the wrong side of the market. Thus, a crash in speculative assets on Wall Street, like the small tech stocks, bitcoin, and meme stocks.

Moreover, last April, the Fed set up markets for another disappointment as it downplayed rate hikes with dovish statements. For instance, in the statement released after the 75-basis points hike, the Fed conveyed to Wall Street that "current interest rates are close to neutral." Thus, the speculative asset rally helped Wall Street stage its best performance since July 2020.

But it all changed last Friday when the Fed delivered another hawkish message during the bankers' symposium in Jackson Hole. And once again, catching many traders on the wrong side of the market forced them to liquidate their positions and sent all major equity averages sharply lower on Wall Street.

"As the saying goes, 'Don't fight the Fed.' But investors have been doing just that — fighting the Fed — since shortly after the June FOMC meeting," Greg McBride, chief financial analyst, Bankrate.com, told International Business Times in an email. "Powell punched back, making it clear that the Fed will continue raising rates and keep them at restrictive levels until they are confident inflation is on a trajectory toward the 2% objective."

That's the hawkish statement, which ended the rally the Fed helped create in the last four months with the dovish April statement.

"The rally in both the stock and bond markets this summer has loosened financial conditions at a time the Fed is trying to tighten," adds McBride. "However, the Fed has a credibility issue on the inflation front, and they will not spare investors from the pain as they work to re-establish their inflation-fighting credibility."

But that has consequences.

"Powell's speech on Friday stressed that the central bank's determination to fight inflation includes sacrificing the economy, pushing it into a recession," Jan Szilagyi, CEO and founder of investment research firm Toggle AI, told IBT in an email.

But markets do not seem to be prepared for such a scenario. Thus, the Fed may be setting them up for another crash.