The Fed has become more hawkish in its public stances. I said in an earlier newsletter that “soft landing” is for 2022 as “transitory” was for 2021. All made up for our entertainment.
The expectation for July used to be a 50bp hike. After the latest inflation report and hearing from the Fed members, I believe it will be more of a 75-100bp hike. There is no Fed meeting in August (they have their annual meeting at Jackson Hole) and will reconvene in September.
Inflation is the story at hand. Until the CPI numbers (the most important report these days) show a month-over-month decrease, expect the same trend to continue. Rates may continue to increase in the short term, but unlike in the 1980s, it is unsustainable. The amount of US debt the Fed holds (and pays interest on), the record number of zombie (can’t afford interest payments on debt) companies existing today, the negative (-1.4%) GDP growth, and the way the global economy is connected, won’t allow for high-interest rates without a recession.
If a true recession ever comes to the table, the Fed will cut rates faster than they increased them. They will also provide plenty of stimulus. We’ve seen these moves during the good times – I expect to see them accelerated during the tough times.
Here is what is in store for this week
Monday
- Pending Home Sales Index
Tuesday
- Richmond Fed President Tom Barkin Speaks
- US Home Prices YOY
- Consumer Confidence Index
- San Francisco Fed President Mary Daly Speaks
Wednesday
- Fed Chairman Powell speaks with ECB President Lagarde at ECB conference
- Cleveland Fed President Loretta Mester speaks at ECB conference
- St. Louis Fed President Bullard speaks
Thursday
- PCE Inflation Numbers
- Initial and Continuing Jobless Claims
Chart Check (see above)
For this Chart Check, what I want to point out is something I’ve noticed during the days before the Fed Rate hikes, and it occurred during this past one too.
The Fed meeting is always on Wednesday. The week opens up with a bond market sell-off in anticipation of the Fed increasing rates. Then that gets priced in so when it actually occurs on Wednesday, there is no negative reaction.
Instead, the market cares more about Powell’s speech – which is usually dovish, and with hesitancy during any aggressive stances. The market usually rejoices, sending rates down for a day or two.
I’m not saying that is going to happen every time, but it has so far. Something to keep an eye out for and to talk to our clients about.
The ECB meeting is this week and I know England (along with Europe) has seen record inflation. The problem is if the ECB cuts rates, while the US increases them, then we face issues of currency wars that will impact import/export global trade. This, however, is a deep discussion for another time.
Click HERE to stay current with the Fed’s meetings this year. You can also view the statements and minutes from previous meetings.
That’s it for this week. As always, reach out anytime with questions, comments or debatable conversations. I’m always here!
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