Data is from CME FedWatch. The March 2023 reaction is interesting.
A month ago, the market viewed the odds of a hike to 5.00 to 5.25 percent as 9.2 percent. Today, the rate hike odds jumped from 39.8 percent to 60.2 percent.
March Rate Hike Odds
Semiannual Monetary Policy Report to the Congress
Powell’s Semiannual Monetary Policy Report to the Congress changed the rate hike odds, emphasis mine.
My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to returning inflation to our 2 percent goal. Over the past year, we have taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do. Our policy actions are guided by our dual mandate to promote maximum employment and stable prices. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of labor market conditions that benefit all.
From a broader perspective, inflation has moderated somewhat since the middle of last year but remains well above the FOMC’s longer-run objective of 2 percent. The 12-month change in total personal consumption expenditures (PCE) prices has slowed from its peak of 7 percent in June to 5.4 percent in January as energy prices have declined and supply chain bottlenecks have eased.
Over the past 12 months, core PCE inflation, which excludes the volatile food and energy prices, was 4.7 percent. As supply chain bottlenecks have eased and tighter policy has restrained demand, inflation in the core goods sector has fallen. And while housing services inflation remains too high, the flattening out in rents evident in recently signed leases points to a deceleration in this component of inflation over the year ahead.
That said, there is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures. To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions. Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2 percent inflation and current trends in productivity. Strong wage growth is good for workers but only if it is not eroded by inflation.
We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.
Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.
Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.
Good Cop, Bad Cop
Powell did not really say anything he has not said before. Rather, the market simply does not believe him.
Also, we had some dovish comments from other Fed presidents in the past week saying they did not support a 50 basis point hike.
Those comments sent the stock market ripping higher. Today we have the opposite.
Is this a good good cop, bad cop ploy to walk the stock market down slowly or is this a genuine disagreement between Fed presidents on what needs to be done?
Higher For Longer
Regardless of intent, the clear message from the lead chart is higher for longer.
If anything, the market still may be underestimating the Fed. The full impact of Powell’s speech was one additional rate hike, front loaded. The entire rise will be in place by June.
A Fed Study Shows Loose Monetary Policy Leads to Disaster and Financial Crisis
In case you missed it, please see A Fed Study Shows Loose Monetary Policy Leads to Disaster and Financial Crisis
Congressional and presidential actions contain hugely inflationary policies, but it’s the Fed’s job to see and react to that. The Fed blew it.
Historical Perspective on CPI Deflations: How Damaging are They?
The Fed’s goal of two percent inflation as some sort or nirvana is the problem. Two percent exponential growth is not stability.
A BIS Study show routine price deflation is a benefit. Central banks have not caught on.
Concerns about deflation – falling prices of goods and services – are rooted in the view that it is very costly. We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt.
Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.
For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?
This post originated at MishTalk.Com.
Thanks for Tuning In!
Please Subscribe to MishTalk Email Alerts.
Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.
If you have subscribed and do not get email alerts, please check your spam folder.
Mish
I expect the Fed to raise rates by a 1/4% in March and by another 1/4% after that, then I’m not sure. It’s too far out, it will be data dependent.