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The Fed: Dissecting recent Fed talk — Central bank set on two half-percentage-point moves for summer

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The disappointing consumer price inflation report for April keeps the focus squarely on the Federal Reserve and its plans for bringing inflation down.

A slew of Fed officials have spoken this week. Here are some of the major themes that have emerged with the next policy meeting only a little over a month away:

We’re going to move by 50 basis points in June and July. Next question.

At his news conference on May 4, Fed Chairman Jerome Powell said “there’s a broad sense on the committee that additional 50 basis increases should
be on, 50 basis points should be on the table for the next couple of meetings.” The Fed speakers this week have all embraced this plan.

75 basis points isn’t ‘off the table,’ but it will take a lot — emphasis on a lot — to make that happen

Going into his news conference, the focus was on what Powell would say about the last-minute idea that floated up right before the central bank went silent: might policy makers lift rates in 75 basis point increments? Powell said such a large move “is not something the committee is actively considering.” This was viewed as a clear “fumble” by Fed watchers and some investors, who argued that Powell should not have taken the “optionality” of a larger move off the table.

Read: ‘Unhinged’ markets followed ‘unforced error’ by Fed’s Powell, says David Tepper

This view gained credence in the wake of the steep losses in the stocks market that followed.

So Fed officials have not taken the option off the table.

“To counter this criticism, they have gone out of their way to keep potential 75 basis point hikes as an option, but with some substantial caveats,” said Tim Duy, chief U.S. economist at SGH Macro Advisors.

Cleveland Fed President Loretta Mester said it succinctly: “we don’t rule out 75 forever.”

Duy thinks the Fed would not move by 75 basis points unless surveys and data show the public comes to believe higher inflation is here to stay. That would be a “break-the-glass” moment for the central bank.

How high will the Fed’s benchmark rate have to go eventually to get inflation down? Next question.

Fed officials remain remarkably wary of saying how high their benchmark interest rate will have to go to get inflation down. Powell only said the rate might have to rise to the 2.5%-3% range. A lot of Fed speakers are sticking with saying that they want to get up to “neutral” — somewhere close to 2.5% — and then they will look around.

These answers drive hawkish observers — and even some old Fed insiders — batty. They note that standard monetary policy theory suggests the central bank will have to get rates up higher than core PCE inflation (now at a 5.2% annual rate) to get inflation down.

Former New York Fed President Bill Dudley said the Fed’s benchmark rate will have to eventually rise to 4%-5% .

“I was 3%-4% maybe six months ago, now I’m 4%-5%. It wouldn’t shock me if I was [at] 5%-6% a few months from now,” he said, in an interview with Bloomberg. Dudley said the Fed is “sugarcoating” how hard it will be to bring down inflation.

“If you keep under-promising what’s required, then I think there is a risk to the Fed’s credibility down the road,” he added.

Duy of SGH Macro Advisors said he thinks policy makers are keeping mum because they don’t want financial markets “to get too far ahead of the central bank.” After all, the Fed’s policy rate is now in a range of 0.75%-1%.

 “Pricing in too much now risks creating destabilizing market turmoil,” Duy said.

We really don’t think the economy will collapse

Fed officials uniformly tried to push back on the notion that a recession is inevitable. This view appears to be embedded in the bond market’s view as well as in the popular media.

Policy makers “sound confident in their ability to achieve a soft landing,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

New York Fed President John Williams said a soft-landing may involve below-trend growth [2%] and despite a possible increase in unemployment, the labor market should remain healthy.

“When I think of a soft landing, it’s really a matter of, yes we could see growth below trend for a while and we definitely could see unemployment moving up somewhat but not in a huge way… I think that’s the challenge,” he said.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.926%

shot higher in the wage of the April CPI data but then pulled back.

Stock-index futures wiped out gains following the CPI data, while equities subsequently traded higher following the opening bell, only to slump into negative territory in afternoon trade. The Dow Jones Industrial Average
DJIA,
-0.81%

was down 161 points, or 1.1%, while the S&P 500
SPX,
-1.32%
,
which logged its lowest close in more than 13 months on Monday, fell 0.8%.

Read next: Why inflation data was no ‘watershed moment’ for stock and bond-market investors

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