FOMC News Conference
You can watch the post-FOMC news conference here. It starts at the 1:00 hour mark. So, the conference is 44 minutes long, not 1:44.
https://www.youtube.com/watch?v=-yiC8wZvzgQ
Mish Notes
Too Early to Pause
“It’s very premature to think about or talking about pausing our rate hikes.”
National Rent Prices
Regarding national rent prices: “Still significant inflation in rent pipeline.” Powell’s statement supports my position discussing new vs existing leases:
Window For Soft Landing
Soft Pivot!?
ZeroHedge had some amusing comments about an alleged soft pivot from people who obviously did not wait to hear the press conference.
Eric Winograd, AllianceBernstein
- “The statement is clear that they would like to slow the pace of hikes. In addition to looking at the data and looking at markets, they are also now considering the cumulative impact of what they have already done. And the lag with with that will hit the economy. Most estimates are that it takes 9-12 months for rate hikes to be felt, and 12-18 months for the maximum effect. We are only just now eight months past the first rate hike, so it makes sense to slow down. I would think rates down, curve steeper, stocks up, based on the statement.”
Peter Boockvar, CIO at Bleakley Advisory Group:
- “The front loading is essentially over and rate hikes from here will be more cognizant of the new economic environment we’re in with respect to the much higher cost of capital and economic clouds that are circling. This is the Fed’s way of telling us that a slowdown in the pace of future hikes is upon us.”
Ira Jersey, Bloomberg Intelligence
- “It makes sense for the Federal Reserve to get back to increasing rates in only 25-bp increments by February, regardless of where the terminal rate ends up. Having the ability to calibrate monetary policy is easier than if it’s moving in larger increments. Fed funds futures, however, took the statement as very slightly dovish.”
- “Some may view a Fed pause as leading to the risk of inflation remaining elevated, however we think eventually the market adjusts its thinking toward a deeper economic slowdown in 2024, and price for no cuts in 2023, but deeper cuts thereafter.”
Soft Pivot Notes From Last Few Minutes of Video Conference
- Powell: “I want people to understand our commitment to getting this done. I control those messages and that’s my job“.
- Q: Has the window for a soft landing narrowed?
- Powell. “Has it narrowed? Yes. Is it still possible? Yes.
- Q: Why has it narrowed? Powell: “Because we haven’t seen inflation coming down. To the extent rates have to go higher and stay higher for longer it becomes harder to see the path. It’s narrowed.”
- Powell: “We would have expected to see by now, as the supply side problems have resolved themselves, we would have expected goods inflation coming down, by now, long since by now. And we really haven’t, not to the extent that we hoped. At the same time you now see services inflation, core services moving up.
- “The inflation picture has become more challenging over the course of this year, without a question. That narrows the path to a soft landing.”
MacroAlf Has the Correct Take
Train Wrecks Needed
MacroAlf has the correct meeting interpretation. So does WinfieldSmart.
But that does not negate my point of view on where this is all headed.
Terminal Rate
The market expectation of a terminal rate is 5.00 percent in June or September of 2023.
As noted in Autopilot Fed Hikes Another Three-Quarters of a Point, I highly doubt we get to 5.0%. In fact, I expect we will see our last hike no later than December 2022 at 4.25% to 4.50%.
My view is not incompatible with the view of MacroAlf or WinfieldSmart.
Train wrecks are needed and we will get them, guaranteed. The only question is on timing.
I expect by the end of the year or March 2023 at the latest.
By then, a Fed pause may not even help the market much. A lengthy economic slowdown will be in progress and Powell even admits as much.
“Reducing inflation is likely to require a period of below trend growth and some softening of labor market conditions. We will stay the course until the job is done.”
Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
I have noted this many times, but please recall my August 19, 2022 post Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
Powell confirmed my view today.
Also see my discussion on rent: Rent Prices Have Declined Two Straight Months, But What Does It Mean?
Today, Powell also confirmed my take “Rent prices are declining month-over-month but don’t read too much about inflation into the decline.”
The above chart provides a needed reality check to those who think rent prices are about to plunge based off Apartment List data. Perhaps that happens, but seasonal adjustments and history suggest otherwise.
So hike away until something breaks. That’s when the Fed pivots. I cannot tell you when, but I suspect sooner rather than later.
Any other questions?
This post originated at MishTalk.Com.
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Mish
The
effect of current open market operations on interest rates is indirect, varies
widely over time, and in magnitude. What the net expansion of money will be, as
a consequence of a given change in policy rates, nobody knows until long after
the fact. The consequence is a delayed, remote, and approximate control over
the lending and money-creating capacity of the banking system.
Rather than bottling up existing savings, the authorities
should pursue every possible means for promoting the orderly and continuous
flow of monetary savings into real investment (which increases the real rate of interest).