Displaying items by tag: hikes
Goldman Sachs updated its path for Fed tightening in 2022 calling for four rate hikes instead of three in 2022. This is a fairly aggressive path for tightening as the current Fed target interest rate is between 0%-.25% which means it will hit around 1-1.25 by Goldman’s forecast. The biggest reason for the rate rises is the tightening labor market. Previously the Fed leaned on slack in the labor market as an excuse to brush off inflation concerns but now they are no longer doing that. Goldman has the hikes penciled in for each quarter March, June, September, and now December. Goldman saw regional San Francisco President Mary Daly’s comments of shedding some balance sheet weight of indicating the Fed’s future path.
Finsum: The Fed hasn’t tightened this quickly in the post-financial crisis era, but broadly the markets and yields are in lock step with Goldman’s predictions.
For the last few weeks, the Fed looked like an out of touch ivory tower central bank committed to driving the US economy into a recession through relentless rate hikes (or at least that was the anxious view). However, the Fed has finally made an announcement which gave investors some calm. The head of the NY Fed commented that being “data dependent” meant listening to markets too, not just the economy. He also contextualized the language from the last Fed meeting, softening its impact. The market jumped immediately on the news.
FINSUM: Too bad it isn’t Jerome Powell making the comments. That said, the Fed must be starting to get nervous that we are close to a bear market.
The moment many investors have been waiting for (or not, depending on how you look at it) has arrived. Rate hikes finally have a chance to slow after their steady rise over the last couple of years. New inflation data has come in showing weakness. Inflation has now fallen below the Fed’s 2% rate, which means the central bank has cause to pause its rate hikes as the economy looks to be on more fragile footing.
FINSUM: There are two ways to look at this. The first is that it takes some momentum away from the current yield inversion. But on the other hand, it could be an indicator that the economy is headed towards recession.
The Fed has hiked rates many times over the last couple of years, but the overall attitude of Fed officials has been very relaxed. They have been diligent to project a very mild outlook of rate hikes. However, that may be set to change, argues the Financial Times. The US economy is growing very strongly, and the odds that the Fed may have to adopt a much more hawkish position are growing. The Fed’s hikes, though frequent, have been small, meaning policy is still accommodative and pro-growth. However, given the state of the expansion, a sharp move higher in rates is looking increasingly necessary.
FINSUM: Given the Fed’s most recent statement, this argument carries some weight. We can see Powell and the team getting more hawkish. That said, the economic tailwind of tax changes is fading, so perhaps it won’t be necessary.
The market took a big hit yesterday following the Fed’s expected rate hike. However, it was not the rate hike itself that caused the problems, rather it was the Fed’s statement and its dot plot. The Fed removed the word “accommodative” (regarding its policy) from its statement, which combined with its more hawkish dot plot, got investors worried. The Fed funds rate is now higher than inflation for the first time in several years. Stock markets fell on the news, with the Dow dropping 0.4%.
FINSUM: The Fed getting more hawkish should make investors worried, as the more restrictive Fed policy becomes, the sooner (and more likely) a recession will arrive.