What The Fed Did He Just Say?

Despite the market celebrating cooler-than-expected CPI and PPI prints this week, one Fed Governor remains thoroughly unimpressed by the progress. 😒

Federal Reserve Governor Christopher Waller said that U.S. central bankers “haven’t made much progress” despite embarking on one of the most aggressive rate tightening cycles in history. He noted that important measures and components of underlying inflation have “basically moved sideways with no apparent downward movement.”

As a result, he believes rates need to move higher for inflation to reach the Fed’s 2% target. Waller also pointed to the current stability in financial markets as evidence that the Fed was right to raise rates in March despite the banking sector turmoil. 🔺

Many have pointed out that economic output and employment have remained stronger than most market participants had expected. This will remain a significant headwind for inflation’s downward path. As such, investors should not expect rates to fall any time soon.

Waller agrees with that sentiment, capping off his remarks, saying, “Monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate.” 📆

Meanwhile, Atlanta Fed President Raphael Bostic said another 25 bp hike should allow the Fed to end its tightening cycle. He noted that this week’s inflation data supports one more hike but that there’s enough momentum to suggest the U.S. is on a path to 2% inflation. ⏯️

As of March’s projections, ten Fed officials agree with Bostic that one more increase followed by a pause is the best path forward. That leaves seven others who think a higher rate than 5.00%-5.25% is necessary. Not exactly an overwhelming majority, but the bond market is currently pricing in a 75% probability of the first scenario.

The big question remains whether or not this tightening will cause a recession. The Fed’s most recent projections include a mild recession later this year as part of its “base case.” Still, some members believe the illusive “soft landing” remains a possibility. 🤷

It’s also important to note that the trend of central banks pausing their tightening cycles continues. Today, Singapore maintained its benchmark rate as inflation declined at the expense of its growth outlook. 📉

Lastly, let’s cover some of today’s economic data. 📰

U.S. retail sales fell by 1% in March, its second straight decline. After excluding gas station sales, retail sales still fell by 0.6%, driven by slowdowns in building supplies (-2.1%), electronics (-2.1%), and clothing (-1.7%). 🛍️

U.S. import prices fell 0.6% vs. the 0.1% expected in March, while export prices fell 0.3% vs. the 0.1% expected.

Industrial Production rose 0.4% in March vs. the 0.2% expected, with February’s number revised upward from 0% to 0.2%. Business inventories rose 0.2% in February, slightly less than the 0.3% expected. 🏭

And finally, U.S. consumer sentiment rose slightly in April but so did inflation expectations. Given the recent uptick in fuel prices, one-year inflation expectations rose to 4.6%, up from 3.6% in March.

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