Two weeks ago, the market got a bit ahead of itself after a red-hot headline inflation print, pricing in the potential for the Fed to hike 100 bps at this meeting. That lasted for about a day before several Fed Governors were in the media reiterating their support for a 75 bp hike. ð
Today, the Federal Reserve did exactly what it told us it would do, raising rates by 75 bps today to 2.25%-2.50%.
Although it was a unanimous decision, Powell’s press conference signaled that this is where the real fun begins. ðĨģ
The Fed has been playing catch up with inflation all year after failing to recognize its “transitory” thesis was wrong last year. As a result, the committee has told us it would act aggressively until interest rates reach what it feels is a ð
According to Powell, they’ve reached that rate and will be taking a more measured approach beginning with their September meeting. That includes giving less precise guidance to the markets about its next move.
What this means is up for interpretation, and Powell was cautious with what questions he did/did not address at his press conference. However, despite his attempts to be coy, there was a loud and clear message in his prepared remarks and Q&A session. â ïļ
With the labor market remaining strong, the Fed is focused on bringing demand back into balance with supply (aka getting inflation’s long-term trend back down towards its 2% mandate).
The Fed cannot do anything about supply chain issues or oil/food supplies. They can only impact demand by raising rates/tightening financial conditions.
So that’s what they’re going to do.
Powell reiterated today that another outsized hike could be appropriate at the next meeting but that the committee will decide as the data rolls in.
He also noted that “…this process is likely to involve a period of below-trend economic growth and some softening of the labor market, but such outcomes are likely necessary to bring prices down.” ðŧ
In other words, the Fed is willing to potentially push the economy into a recession and cause a weakening in the labor market to get inflation in check.
Powell and the committee know that high inflation causes pain in the economy and would prefer to pay the piper now rather than deal with it when it becomes a much bigger issue.
We’ve already seen housing market activity crater as interest rates/prices rose. We’re also seeing softening in some areas of the economy, like retail, where companies are dealing with inventory gluts, and consumers are cutting back on spending. Not to mention business and consumer sentiment, which have fallen to multi-year (or in some cases, multi-decade) lows. ð
So far, aggregate-level labor market data has remained strong, but there are pockets of the economy like tech that are seeing layoffs/hiring freezes daily.
We can expect some labor market data to begin turning in the months ahead as Powell and the Fed sacrifice some jobs at the altar of inflation to get prices back in check.Â
Lest there was any doubt, continued economic weakness is coming. We just don’t know how harsh it will be or how long it will last. ðĪ·ââïļÂ
So far, the markets are cheering today’s news, but we’ll have to see if that enthusiasm holds into the weekend or if it reverses as it did in June.Â
Guess we’ll just have to wait and see. ð