It was a banner week for the Fed last week.
Fed Chairman Jerome Powell and the rest of his colleagues on the Federal Open Market Committee (FOMC) pretty much made history — well, recent history anyway.
They put on their big boy pants and stepped up their war on inflation. By a vote of 10 to 1 (with only the President of the KC Fed dissenting) they raised the fed funds rate by 75 basis points (three-quarters of a percentage point).
This was a pretty momentous move for the Fed who usually nudges the funds rate around by 25 basis point increments.
The previous month they had bumped the funds rate by 50 bps which seemed aggressive.
The fact that they went 75 at this meeting — especially when Jerome Powell said a “75 basis point increase is not something the committee is actively considering” after the last meeting — was something akin to the Fed pulling the fire alarm. (There was even a rumor that they might have tightened as much as 100 bps — but that would be like sounding an air raid siren.)
They leaked the possibility of a 75 point move over the previous weekend so as to not shock the market too much. Still, the market gave up 5.8% over the course of the week so that strategy was pretty much questionable.
Things Are Not So Bad…
During his initial statement, Chairman Powell touched all the bases in the most positive tone he could saying things like…
Recent indicators suggest that real GDP growth has picked up this quarter…
FOMC participants expect supply and demand conditions in the labor market to come into better balance, easing the upward pressures on wages and prices.
The median (inflation) projection is 5.2 percent this year and falls to 2.6 percent next year and 2.2 percent in 2024…
Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent.
The American economy is very strong and well positioned to handle tighter monetary policy.
So things are not as bad as you might be thinking they are.
…Yeah They Are
Well, it really depends on your definition of what “bad” is. My guess is paying $5 a gallon at the pump and $12 a pound for steak would qualify for most people.
The market typically judges how bad the Fed thinks a situation is based on the difference between expectations and reality. If a 50 basis point move is the expectation and the Fed moves 50, then everything’s as expected and under control. If we expect 50 and the Fed moves 75 (or 100) well, it’s more likely things are pretty screwed.
Powell tried to play the unexpected rate hike off as a “we’re on top of the situation” message. But in reality, they’re not. And in his Q&A, Powell let on they’re really concerned with something they consider even more important than actual inflation. (I’ll explain that in your next letter.)
In the meantime, this month the Fed shouted a stern warning at inflation.
We’ll have to see what Inflation says back…
Make the trend your friend,
Editor, Streetlight Daily