Good Morning Friends.
Yesterday’s FOMC was strange in that markets priced in a 3.2% hike this year, and actually with them pulling forward 75 and not committing to what will happen next means a 2.5% is potentially the max they’ll do this year to avoid pushing us into a more aggressive recessionary enviroment.
Now the problem the Fed has, which no one asked about and they did not talk enough about when talking about soft/hard landings, is the fact that Americans are NOT demanding or using services. The areas of inflation and where supply has squeezed demand is still way to high…and in the area that could “grow” i.e., services, Americans have no demand for. So the normal market environment that the Fed has historically had to respond to would have seen more demand growing in the services areas while demand decreased incrementally on goods.
Most of the meetings they have talked about a neutral rate without saying what it was, now it was clear yesterday that it is around 2.5% and they understand that they’ll need to hike rates beyond the neutral rate to get to the neutral rate year-over-year,so to get beyond 2.5% they’ll drive us in 2022 to 3.2%, but that seems unlikely with the recessionary pressure.
Another BIG change is that until now the Fed has always said they’re targeting PCE, and when asked about headline and core CPI they said they’re looking at Headline CPI because they are actually trying to minimize expected inflation, and the only way to do that is for the Fed to take strongly into consideration headline CPI and not only PCE. The Fed is targeting CPI because we cannot have expected inflation unanchored from actual inflation, and since expected inflation includes some of those day-to-day commodities people use, even if they can not print food, oil, gas, or fertilizer,t hey will need to take a more aggressive stance to drop demand.