August 16, 2022

How Long Will the Fed Hawks Keep Flying?

The main bank has a problem. It has already driven rates extremely close to the limit.

Following the June FOMC meeting and the Fed’s 75- basis point interest rate hike, I contended that the central bank is  totally winging it .

Reading between the ranges in  the mins   from that will June meeting seems to keep this out. The Given appears to be in reaction setting. The question becomes what will this react to next? How long can the hawks keep soaring as the economy tanks?

It’s pretty crystal clear that the big rate hike was a knee-jerk reaction to  hotter-than-expected May pumpiing data . You’ll recall that just weeks prior to the June meeting, a 3/4% rate hike wasn’t actually on the table.

It was.

Near-term policy rate targets shifted markedly toward the end of the period, particularly after the release of the May consumer price index (CPI) report. Ahead of the release of the survey, market expectations reflected an extensive consensus that there would be 50 basis point rate raises at both the June and July FOMC meetings. After the release of the higher-than-expected inflation data, policy-sensitive rates directed instead to a considerable possibility of 75 basis point moves at both the 06 and July meetings. ”

In summary, Powell & Company hoped  inflation had peaked   earlier in the spring, but with the “ surprising” increase in CPI, the central bankers felt required to go big. Why? As they are suddenly concerned about their reliability.

Numerous participants judged that a substantial risk now facing the Committee was that elevated pumpiing could become entrenched if the public began to question the particular resolve of the Committee to adjust the stance of plan as warranted. ”

In other words, the particular Fed is like a kid in the schoolyard concerned that if this individual doesn’t act tough, everybody will think he’s a chicken. The problem is, he’s not a tough guy. As my father used to say, “ He is writing checks his body can’t cash. ”

The minutes reveal the FOMC expects one more big hike in July.

In discussing potential policy actions at upcoming meetings, individuals continued to anticipate that will ongoing increases in the target range for the federal money rate would be appropriate to offer the Committee’s objectives. In particular, participants judged that an increase associated with 50 or 75 foundation points would likely be suitable at the next meeting. ”

But the central bank has a problem. It has already driven prices very close to the limit. In the event that rates go much higher, there is certainly every reason to believe the economy will completely implode. In 2019, 2 . 5% was the max. At that point, the particular economy got shaky, the stock market crashed, and the Given went right back to loose monetary policy. (Not that will 2 . 5% interest rates are usually particularly tight. ) Within 2019, the Fed reduce rates three times and had already gone back to QE – even before the pandemic.

So , what makes anybody think the Fed can push rates to 3 or 3. 5% today with even more debt throughout the economy?

And again, the Fed seems to be in reaction mode. There is no long-term strategy. My guess is if we discover any relief in the June CPI data, the Fed will start signaling that they are yet to tightened enough. And some inflation relief seems likely. Item prices have dropped – most significantly the price of essential oil – in anticipation of the recession. This will likely relieve some of the price pressures in the economy.

But the relief will be temporary if the Fed rotates back to rate cuts and  quantitative easing .

Speaking of quantitative easing, the Fed has completely forgotten all about balance sheet reduction. The FOMC had signaled quantitative tensing would start in June.

It didn’t.

The Fed handled to  shed less than $1 billion from its balance sheet   throughout the first month of QT. Meanwhile, the Fed’s mortgage-backed security holdings actually  increased   by over $1 billion.

So while the shade coming out of the Fed might be hawkish – the reality is much less so.

But it will surely likely get even much less so once the economic facts set in.

Government Reserve Chairman Jerome Powell has been running around insisting the economy is strong enough to handle rate hikes.

But if you consider the strength of the economy, families are in very strong financial form, they’ve still got lots of excess savings – from forced saving of being unable to travel and things like that will – and fiscal exchanges. The same thing is true with business, with very low rates associated with default and lots of cash within the balance sheet. The work market is also tremendously strong, still averaging very high job growth per month. Overall, the US economy is in the position to withstand tighter monetary policy, we think. ”

Keep in mind that this message can be brought to you by the same guy who gave us “ transitory” inflation.

And this messaging seem just like dubious.

The  Atlanta Fed offers downgraded its Q2 GROSS DOMESTIC PRODUCT forecast   in order to -2. 1%. That would mean the economy has been in an official recession since the first of the year.

That brings us back to the burning query – will the hawks keep flying if it turns out we really are in a recession? Will the Fed become willing to go 50 or 75 basis points using the economy sliding and inflation seemingly cooling?

I don’t think so. As Rick Rule put it, the particular Fed will almost certainly  chicken out on this inflation fight . The Fed is in reaction setting, and the reaction will likely be — run!

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