If nothing else, I took one thing away from this week’s Fed decision: don’t expect rate cuts anytime soon. The market had priced in a 25 bps rate increase – with the Fed flagging it well in advance. And the Fed didn’t disappoint. But what they were hoping for was more of “dovish hike” It wasn’t coming… Powell is keeping things tight-lip. And he has good reason to… he (like the market) simply doesn’t know what lies ahead. And whilst things appear to be trending in the right direction – it’s far too premature to call a victory over unwanted inflation
What Banking Crisis?
Are things actually looking up? If your measure is the equity market… you would say absolutely. Stocks continue to charge higher on the back of lower inflation and optimism the Fed is closer to the end of its hiking cycle. What’s not to like? However, there’s something else giving markets a boost. Easy money! Financial conditions are as easy as they’ve been all year. For example, it was only 4 months ago and we had a mini banking crisis… where funding was a lot tighter. That’s now a distant memory.
Fed Can Keep Raising w/Core CPI 4.8% YoY
The market celebrated the June monthly CPI data. Headline CPI came in at just 3.0% YoY – and Core CPI fell to 4.8% YoY. Good news. However, with Core CPI still more than 2x the Fed’s target – expect them to raise rates again at the end of the month. However, what surprises me is the market believes the war with inflation is basically done. Is it? I think that is presumptuous. The fight with Core inflation will be a long one. If correct, the Fed may not need to keep raising rates aggressively – however are likely hold them there until their objective is met.
Fed Minutes Suggest More Hikes
Today the Fed released this statement from their latest minutes “The economy was facing headwinds from tighter credit conditions, including higher interest rates, for households and businesses, which would likely weigh on economic activity, hiring, and inflation, although the extent of these effect remained uncertain”. But here’s the thing: the market could be underestimating how long the lag effect is. Typically it’s between 12 and 24 months. However, with an extra $2+ Trillion in (perhaps wasteful) government handouts, that has softened the blow dealt from higher rates. But make no mistake – the lag effects from 500 bps of tightening will come – it’s just longer than expected.
For a full list of posts from 2017…