Fed Rate Hike Odds Jump to Full Point After the Hot CPI Report

July 14, 2022

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1:17 am

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35 comments

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Economics

Chart courtesy of CME Fedwatch, annotations by Mish.

July Rate Hike Synopsis

Yesterday, the market penciled in a three-quarter point hike. Today, the market expectation is for a full point hike.

The WSJ notes that would be the largest hike since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s.

“Everything is in play,” Atlanta Fed President Raphael Bostic told reporters in St. Petersburg, Florida, on Wednesday after US consumer prices rose a faster-than-forecast 9.1% in the year through June. Asked if that included raising rates by a full percentage point, he replied, “it would mean everything.”
Cleveland Fed President Loretta Mester, speaking Wednesday evening in an interview on Bloomberg Television: “What I take from the report, and it was uniformly bad — there was no good news in that report at all — is that inflation remains at an unacceptably high level,” she said. “We at the Fed have to be very deliberate and intentional about continuing on this path of raising our interest rate until we get and see convincing evidence that inflation has turned a corner.”

Word of the Day is Hot

Today, the BLS reported the CPI rose 1.3 percent in June. Year-over-year prices rose 9.1 percent, a new four-decades high.

Both were well above what economists expected. And economists did not expect anything good.

For discussion, please see Consumer Price Index Jumps Another 1.3 Percent, Much More Than Than Expected

Also note No Matter What’s in Your Food Basket, the Price Keeps Rising Fast

Commodity prices are plunging, but except for gasoline, there is often little correlation to consumer prices.

This post originated at MishTalk.Com.

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nich123

3 years ago

jun 2021 cpi = 270.955, jun 2022 cpi = 295.328.

(295.328 – 270.955)/270.955 = 0.08995.

Rounding of 0.08995 = 9.00%.

Can anyone explain why 9.1% is everywhere?

prumbly

3 years ago

Dr Copper just hit a 20-month low. Oil in a downtrend during the summer driving season. Housing market collapsing. All very inflationary, apparently.

Captain Ahab

3 years ago

Another way of looking at inflation/CPI is month over month data: https://tradingeconomics.com/united-states/inflation-rate-mom. I don’t see lower inflation imminent.

If you click on the chart for 5y data, or 10y, or 25y, you will see the upward trend in monthly inflation, beginning after the covid spike. 2008 is also visible… The Fed ought to be worried. They CAUSED it.

TheCaptain

3 years ago

Inflation and rising prices are related but different. Inflation is an increase in the money supply (including what passes for “money” these days and debt since debt spends just like money in our monetary system. Rising prices can be due to many things including supply chain interruptions. The major factors in price stability are the money supply and the production.

– If the money supply is growing (either by printing or by assumption of new debt) then we have inflation regardless of the direction of prices.

– if the money supply is contracting (generally via debt reduction by any means) then we have deflation regardless of the direction of prices.

– If the money supply is growing faster than production, prices will trend up.

– if production is growing faster than growth of the the money supply, prices will trend down. Note: this is NOT deflation.

Today we have supply chain interruptions, the Great Resignation, and rapid increases in the fed’s balance sheet (monetization of debt). These add up to provide rapidly rising prices which I like to call CPIflation to differentiate from inflation.

The final thing to consider is that paper currency is not money. It’s just paper. They print it up from thin air and without restriction. That means that the currency is intrinsically worthless. It is a faith based currency. Confidence is another word for faith and confidence is the central requirement for running a con game which is what fake paper money actually is.

Most people still think of our banking system as a fractionally reserved system but not long ago the fed removed all reserve requirements from the system. In other words, there is no requirement to hold any currency before lending out more. It’s true, go look it up. It happened on March 15 2020.

People still accept the fake paper money as if it had intrinsic worth but this too shall pass. When? Nobody knows for sure how long the madness of crowds will continue to believe that unbacked paper currency has any value. But when people lose confidence in the issuing authority, that is generally when the so called hyperinflation begins. We are not there yet but thinking people will realize sooner rather than later that no fiat currency has ever stood the test of time and no, it won’t be different this time. When the hyperinflation comes it will take most people by surprise because of the rapidity of onset. They will say “how can the currency be losing its purchasing power so quickly” when in fact they should be saying “its amazing that suckers have taken so long to realize that unbacked paper currency has an intrinsic value of zero”.

Nothing structural has to occur for hyperinflation to set in because the currency is already worth zero. All that has to happen is for the suckers to figure it out en masse. And once they do it will be like an avalanche: first a little, and then all at once.

Captain Ahab

3 years ago

Reply to TheCaptain

Your pessimistic view is appreciated. All that stands in the way is the scale of the US dollar in the world, not just in trade, but in many other important things (for example debt denominated in US$). It will be sheer scale that saves the buck. What might be its undoing?

I doubt we’ll see ‘an intrinsic value of zero’ any time soon. However, the opening now exists for a non-aligned international currency for trading/transaction purposes. Some Russia-China currency mix won’t cut it, but a stable NEW currency would be a game changer. Gold-based would be best, yet unlikely.

az_dirt

3 years ago

With oil at a little over $91 this Thursday AM we might think that inflation driver has peaked. So the 9.1% number is also looking in the rear-view mirror. So when the Fed raises (either 1 or .75) they’ll be reacting to last month’s data and raising too far.

whirlaway

3 years ago

See how the talk is only about interest rates and not about QE/QT anymore? Since QE was started after rates were taken to zero, it is logical that QE has to be reversed completely (via QT) before rates can be raised even one basis point. But that will never happen. Of course, that is because interest rates affect regular people while QE helps the rich and the moneyed class.

kw19968

3 years ago

It seems to be a popular notion (even here which seems odd to me) that inflation can always be “corrected” by managing (i.e. manipulating) interest rates. But inflation has more to do with the size of the money supply than with access to markets.

Printing too much money means prices go up. (I’m disappointed to not see much if any appreciation of this truth in the social media, and especially here.)

Artificial raising of interest rates is not a good thing to be doing now, or ever.

Sending billions of newly printed U.S. dollars overseas in the current economic environment is exponential evil.

kw19968

3 years ago

Reply to kw19968

Check out the Federal Debt to GDP ratio…(‘USGDG’ on tradingview.com).

What you see is Federal Debt up on “dying” GDP.

Now, tell me, what happens when the Fed raises interest rates (in a capitalist”(?) society. Yeah right.) while GDP goes down?

Captain Ahab

3 years ago

Reply to kw19968

We might call this ‘diminishing returns on faux debt.’

killben

3 years ago

Wall street seems to be drooling over the rate cuts early next year (not gonna happen anytime soon). Will these guys ever learn to stand on their own feet? First the Fed has to get the inflation genie into the bottle. That is gonna take well into 2023 and probably 2024.

Where does that leave the market – staring at an abyss as it learns to stand on its own feet. Incidentally unemployment has to go down some to control inflation too. The central bankers have been handed their heads on a plate by inflation. Man indeed to have floored the Kingkongs.

“In the current situation, from a risk-management perspective, it is important for policymakers to ask which situation would be more costly: erroneously assuming longer-term inflation expectations are well anchored at the level consistent with price stability when, in fact, they are not? Or erroneously assuming that they are moving with economic conditions when they are actually anchored? Simulations of the Board’s FRB/US model suggest that the more costly error is assuming inflation expectations are anchored when they are not. If inflation expectations are drifting up and policymakers treat them as stable, policy will be set too loose. Inflation would then move up and this would be reinforced by increasing inflation expectations. If, on the other hand, inflation expectations are actually stableand policymakers view the drift up with concern, policy will initially be set tighter than it should. Inflation would move down, perhaps even below target, but not for long, since inflation expectations are anchored at the goal.

These simulation results, coupled with research suggesting that persistent elevated inflation poses an increasing risk that inflation expectations could become unanchored, strongly argue against policymakers being complacent about a rise in longer-term expectations. Indeed, inflation expectations are determined not only by movements in inflation but also by policymakers’ actions to follow through on their strongly stated commitment to return inflation to its longer-run goal, thereby justifying the public’s belief in the central bank’s commitment.”

–Loretta Mester, President of the Federal Reserve Bank of Cleveland

The Role of Inflation Expectations in Monetary Policymaking: A Practitioner’s Perspective

June 29, 2022

Lisa_Hooker

3 years ago

Reply to killben

One of the nice features of a free market economy is that you don’t need interest rate “policy.”

But you all knew that.

dtj

3 years ago

Interest rates were -7.5% last month. This month they are -8.5%. So now the fed needs to raise rates by 1% in order to get them back to -7.5%.

Captain Ahab

3 years ago

Reply to dtj

I’m not sure what an interest rate of -7.5% is. Do you mean the real risk-free interest rate? If you do, then we have a major cluster fudge underway–a wealth redistribution of a magnitude that boggles the mind, and sub-optimal investment decisions that will greatly affect our future.

What if interest rates are determined outside the Fed’s control? By raising rates in arrears, is the Fed is merely responding to the market? That is, the Fed no longer has control.

worleyeoe

3 years ago

Unless Ukraine or something else causes an unforeseen shock, we’re at peak inflation which justifies a 100-basis point raise, since the Fed now knows full well it’s playing catchup. This will help the Fed get the FFR up to 4% by year’s end with a two 50’s and one 25.

A 4% FFR might get me some 5.5%, 5-year, call protected CD’s from Fidelity, or $150K netting my IRA $47K. Nice!

killben

3 years ago

Mr.Market does not seem to have got the message from Lester and Bostic and seems to be focussed on the forthcoming rate cuts. Pavlov’s dogs have got used to bad news being good news the last decade. The Fed is in a stew of its own making

9TIMES9

3 years ago

I keep hearing about how the Federal Reserve has a trading desk on wall street and how they are buying the market. Is this a possibility? They keep talking about all these emergency measures central banks are doing around the world. And the possibility of moving trillions back and forth on over night repos to make an illusion of stability? Any insight would be appreciated. Thank you.

Mish

3 years ago

Reply to 9TIMES9

No, the Fed is not buying the market

JackWebb

3 years ago

Reply to 9TIMES9

They manipulated the Major Market Index in 1987, and it was the right thing to do. But I really think that was a one-off. Of course, I thought that their QE after 2008 was a one-off.

killben

3 years ago

Reply to JackWebb

The original mandate was to provide backstop to bank run by providing liquidity, which was a good idea. But Greenspan converted it to providing backstop for markets every time it sneezed using interest rate as a tool (silly idea if ever there was one – forgetting that for a resource to be used wisely it has to have a cost) which was then followed up by the self-appointed master of the Great Depression (who incidentally claims to have saved the world – hint – a bearded oaf) by QE forever and then Powell who announced he would buy everything. Unfortunately the effects will be felt after decades.

The entire bunch of Fed Chiefs should be lined up and shot for over-reach of the Fed’s mandate and destroying the world by manipulating the USD. You can also shoot the other central bankers while at it for playing along as it suited them

Captain Ahab

3 years ago

Reply to 9TIMES9

The Fed doesn’t need to manipulate the market if the big money bankers (Goldman and friends) do it for them. Not even a phone call, email or text, but a wink and a nod.

JackWebb

3 years ago

They really should raise it by 200bp, but they’ll have to wait for more news. Whatever anyone thinks about Fed actions, one thing is clear to all: They have no grip. They are acting on news. Anyone who’s been in the money management business knows what a loser’s game acting on the news is. This blog closely analyzes every jot and tittle, and that’s a good thing. But no one should have any illusions: The Federal Reserve is truly a deer in the headlights.

I live in the countryside. The only critters I have not seen on our property or very close by are grizzlies, polar bears, and wolves. We have cougars, and we have bobcats that are so big that you could easily think they’re cougars. We have wild turkeys all over the place. The neighbor down the hill shot a bear, disassembled it, and offered us some meat. I accepted a year later, but they’d eaten the whole thing. We have all the smaller vermin, plus turkey vultures, owls, bald and golden eagles, and elk. And deer.

Bambi is a nasty one with good p.r. Her eyes are not up to snuff. She is far from eagle-eyed. Early in the morning and at night, her eyes have trouble. It’s why the vehicles around here sport grille guards. Only fools and motorcyclists (one in the same) drive faster than 35 miles an hour except in full daylight. Every year or so, some donor cyclist from Portland buys the farm after running into Bambi just after dawn or at dusk. Headlights immobilize her. And the Federal Reserve.

Even if they do what I think are the right things, it doesn’t matter in a way because they don’t have a clue.

p.s.: I dropped off a bag of cherries from an orchardist friend at a neighbor’s house today. They told me they’ve been seeing a bear and a cub lately. I thought about offering to lend my Henry lever rifle in .308 (“Made in America, or not made at all”), but they’re from Portland and they think bears are cute.

JackWebb

3 years ago

Reply to JackWebb

One more thing. It sure looks like the Fed’s being pressured by the Canadian central bank that raised by 100bp today. Really, the Canadians? Think about it. Canada’s contributions are tar sands, maple syrup, self-righteousness, and (saving the most hilarious for the end) “poutine.” Poutine is french fries doused in gravy. It comes from the Quebecois, a/k/a the Clampetts of the francophone world. The Fed is following the Canadians? This is a country where pizza parlors send people across the border to smuggle mozarella to evade the dairy farmers that have driven cheese prices into the stratosphere. How low can you go?! God help us all.

Doug78

3 years ago

Reply to JackWebb

Poutine is very good and it sticks to your ribs. Eat a plate of it and you are good to hike for twenty miles in the snow to check your beaver traps.

Captain Ahab

3 years ago

Reply to JackWebb

Poutine, eh?

The British version is a chip sandwich. Chips (aka greasy French fries) and a ladle of cooking oil on two pieces of very white bread.

The US version is the iconic hotdog, a dubious meat-by-products frankfurter on a tasteless bun.

The Australian version is a meat pie: a baked pastry shell with something resembling morsels of ‘meat’ and ‘vegetables’.

Lisa_Hooker

3 years ago

Reply to JackWebb

You forgot to mention the cheese curds under the gravy and on top of the fries. No accounting for some people’s tastes. (You wouldn’t believe what they call chili in Cleveland.)

Felix_Mish

3 years ago

Reply to JackWebb

Ha, ha. You’re hitting your stride today with these comments.

“they’re from Portland and they think bears are cute“

I rest my case.

But let’s be honest, bears are cute. That’s not saying I don’t ponder with sober deliberation the meaning of life when a cute little cub crosses the trail ahead of me.

JackWebb

3 years ago

Reply to Felix_Mish

If this blog allowed pictures (not that I want it) I’d post one of me standing on a bear skin rug, bought from a taxidermist with a genius I.Q. Hey, this is America, and if you stop and listen to people — too many people don’t — you will meet some amazing and surprising people. Another one would be my friend the North Dakota potato farmer with a 164 I.Q., something he told me only after we’d known each other for some years. His high school principal accused him of cheating on some test, and wound up apologizing after the I.Q. test. He was pissed when I told him that I had told anyone about his I.Q., because that’s putting on airs.

Everyone including me is scared of rattlers, cougars, and wolves, for good reason. But guess what? The most dangerous animals other than the pit bulls owned by tweakers are deer and black bears. They are so cute until they’re attacking you. Not only that, but bucks in particular are disease vectors. Get your arm scratched deep enough by a buck you’ve just shot, and you’ll be in trouble, as in dead by infection.

Zardoz

3 years ago

Reply to JackWebb

I’ve encountered 90lb girls

“controlling” 90 lb dogs on the trail often enough that I’m pretty sure they’re the biggest threat in the woods. I used to never carry when hiking. Now I always do, dorky as it feels.

Lisa_Hooker

3 years ago

Reply to JackWebb

The question, when a cute bear cub crosses your path in the deep woods is: is he trailing behind mama, or is he leading mama by just a little bit?

radar

3 years ago

Reply to JackWebb

Nice rifle. I have an old Winchester 88 lever in 308. I inherited from my dad, who inherited from his uncle who lived in Oregon and killed many Elk and deer. I haven’t shot anything but paper with it (I grew up hunting with shotguns) but hope to hunt with it some day.

Doug78

3 years ago

Reply to JackWebb

You sound like you are describing country life but in reality it is a Wizard of Oz-type allegory of political life in Washington DC. Bambi clearly is the Democrat leadership, bobcats are House staffers. Cougars and wolves are House members. Grizzlies and polar bears are Senators. Turkeys, vultures, owls and vermin are government bureaucrats of varying levels and abilities. The bag of cherries is a mystery to me though. Is it an allegory for insider stock trading tips from Pelosi? I wonder.

Zardoz

3 years ago

Reply to Doug78

And the squirrels are the nattering nabobs of the blogosphere.

Doug78

3 years ago

Reply to Zardoz

Those squirrels are the smartest because they live in trees and have squirreled away tons of nuts for the bad times to come.

FromBrussels

3 years ago

Reply to JackWebb

Lucky fella ! ….I d say… Invite me over one day …

Fed Rate Hike Odds Jump to Full Point After the Hot CPI Report

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