Wednesday’s strong equity market rally would disagree, but if you’re looking for a Federal Reserve (Fed) put on your market positions, you’ve come to the wrong place. The same goes for those unprepared for a recession. The Fed has made it clear inflation is public enemy #1 and if markets falter and unemployment rates rise, so be it.
Of course, slowing the economy is the whole point.
Chairman Powell explicitly said as much during his post-meeting press conference. But in some ways, the Fed has relatively benign circumstances to front-load rate hikes. The U3 unemployment rate is at 3.6% and there are still more than five million open jobs above the current total unemployed workers in the labor force. Labor markets may moderate in the coming months, but are starting from a position of considerable strength. Let the politicians argue whether the economy is in recession or not, it doesn’t matter to the Fed at this point.
The Federal Reserve Open Market Committee (FOMC) kept applying the brakes and lifted rates another 75 basis points (bps), the third jumbo-sized rate hike in a row. This time, the debate was between a 75 or 100 bps rate hike. The hotter-than-expected June Consumer Price Index released on July 13 pushed the probability of 100 bps at the July 27 meeting to well over 50%. Several Fed officials pushed back, publicly leaning toward 75 bps just before the Fed’s public comment blackout period began. Given the FOMC vote was 12-0, there was little disagreement on the decision among policymakers.
In the grand scheme of things, does it really matter whether the Fed raised rates 75 instead of 100 bps? Probably not. But at one point, Powell suggested policy rates were at neutral, which seems like an unforced error. Using even a generous long-term view, real policy rates — measured by the high end of the Fed’s target range (2.50%) minus the five-year Treasury Inflation-Protected Securities break even rate (~2.60%) — are still negative. Implying monetary policy remains stimulative. If the Fed is serious about getting inflation moving in the right direction, policymakers must keep tightening until real rates become restrictive. The Fed is on the right path by front loading rate hikes, especially given our sense the markets are biased to push back against at every opportunity. The Fed is close, but still has work to do. Better to act while the window is open.
In short, the sooner you get to your destination the sooner you can stop.
A few key points from Wednesday’s Fed meeting and Chairman Powell’s press conference:
Bloomberg, FOMC Dot Plot and World Interest Rate Probability
FOMC Press Release, July 27, 2022