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What's the Likelihood of a Fed Policy Error in the Opposite Direction?

The Fed Funds Rate (FFR) is currently 2.25-2.50. The markets perceive 4.25-4.50 by February of 2023, another 200 basis points. Is that too much?
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Target rate probabilities by CME, annotations by Mish

Target rate probabilities by CME, annotations by Mish

The CME Fedwatch Tool suggests an 84 percent chance of a three-quarter (75 basis point) hike on September 21 with an additional 16 percent chance of a full point hike.

75 basis points is a near certainty but then what?

Betting Odds Path

  • September 21, 2022: 3.00-3.25 (+ 0.75)
  • November 2, 2022: 3.75-4.00 (+ another 0.75)
  • December 14, 2022: nearly equal chances of 4.00-4.25 or 4.25-4.50 (+ another 0.25-0.50)
  • February 1, 2023: 4.25-4.50 (+ another 0.50 vs November)

The grand total is another 200 basis points of tightening in the next 6 months. Wow.

Another Policy Error?

Guessing Game 

I am certain that if the Fed gets to 4.25 to 4.50 it will have made a second major policy error.

Some believe the Fed already has. I do not believe so, but I would not rule it out entirely.

Demand Destruction Happening

Schiff vs Steven Van Metre

This debate is not even close. Steven has this correct, in spades, especially if the market odds are correct. The next 75 basis point hike in September could easily be enough.

The more one believes the hikes will occur, the better the trade right now into long-dated treasuries. 

If the implied rate hikes do not occur, the implication will be that the Fed's policy will have already over-tightened, perhaps by a lot.

Fed to the Rescue?

Don't count on that unless the credit markets freeze. 

Right or wrong, the Fed will be very leery of loosening too much too fast again. 

63 Percent of Small Businesses SMBs Have Put Hiring on Hold

Please note 63 Percent of Small Businesses SMBs Have Put Hiring on Hold

Some 66% of them say we're in a recession for sure with 28% adding it feels more like a "Depression."

Increasingly Likely That Alleged Job Strength is a Mirage of Part Time Second Jobs

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Full Time and Total Emploiyment vs Job Level 2022-08

Also note Increasingly Likely That Alleged Job Strength is a Mirage of Part Time Second Jobs

March to August Key Points

The economy added 1,888,000 jobs while full time employment declined by 383,000 and total employment (as measured by sum of full and part time) was down by 48,000.

The total discrepancy between the trends is 1,888,000 + 48,000 = 1,936,000

The household survey seems much more believable than the raw nonfarm payroll numbers.

How Far Will the Fed Go?

The election is November 8. The Fed meets on November 2. It has an easy out if it wants to pause at the November meeting. 

And if it does, September could be the last hike this cycle. If the Fed does get in one more, I suspect November will be the last. 

By then, it should be clear recession has started. If the prices of goods are still rising it will be over supply issues not demand. 

Inept Fiscal Policy in Play

Inept fiscal policy also comes into play. Biden's energy policies and de-globalization are both very much in play.

For discussion, please see First a Trade War, Now a Real War, Why US Exports to China Continue to Suffer

De-globalization and decarbonization are both inflationary. The Fed will greatly fear triggering more inflation. So even if it over-tightened, don't expect the Fed to come quickly to the rescue unless there is a credit event.

Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

The net result of everything above is a Long Period of Weak Growth, Whether or Not It's Labeled Recession

Stocks are not priced for any of this, especially a Fed overshoot that I believe is baked into the cake.

This post originated at MishTalk.Com

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