Last week Fed Chairman Powell announced how the Fed will do whatever is necessary to battle inflation. He also keeps referring to his admiration of Fed Chairman Paul Volcker, who famously increased interest rates to near 20% levels in order to battle inflation. This ultimately helped battle inflation but also was credited for sending unemployment to double digits and adding fuel to the recession that occurred in the early 1980s. The Fed’s 50bp rate hike is nothing compared to what Volcker did, but the Fed has laid out plans to increase rates a total of 10 times this year. Powell’s jawboning seems to be raising rates enough on its own, which I believe is the intention.
Here is what we have in store this week
- Fed Bostic Speaks
- New Home Sales
- Fed Chairman Powell Speech
- Fed Minutes Released
- Fed Brainard Speech
- Initial and Continuing Jobless Claims
- Pending Home Sales
- PCE Inflation Numbers
- PCE Inflation (year over year)
- 5 Year Inflation Expectations
With last week’s action, we seemed to have broken a particular downtrend channel and are more in a (very short term) horizontal channel. I’m taking this as what I feel like it is, a short-term relief in rates. There is nothing to suggest that MBS have bottomed and a reversal is to take place, although it would be very nice.
The Fed has made it clear that in the short term they will increase rates. I expect them to follow through with their June hikes, especially since Powell was able to calm markets with his “soft landing” speech. Again, anything can happen in the short term. Long term, however, the fed is just giving itself some breathing room in order to cut rates again when the corporate debt market begins to unravel.
I will also change my tune a bit when we receive signs/reports of peak inflation. Remember, the disease doesn’t have to be cured, it just needs to “go from bad to less bad” in order for markets to start making bets on the trend reversal.
If the Fed does make a policy change or a drastic decision, it will most likely take place at their Jackson Hole meeting in August. This is usually the platform they use to announce major changes.
That’s it for this week. As always, reach out anytime with questions, comments or debatable conversations. I’m always here!