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Will the Fed Pull the Trigger on a Pair of Three-Quarter Point Hikes?

June 14, 2022

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1:09 am

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35 comments

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Economics

What Happened?

That’s an enormous jump from 23.2% yesterday to 95.5% today.

The jump on June 10 from June 6 is understandable given the horrific CPI report. But that only took the odds to 23.2%.

Given this is a Fed quiet period it’s not due to official Fed yapping. A leak? JPMorgan yapping?

Regardless, here we are at +0.75 percentage points with the Fed having penciled in +0.50 percentage points.

Target Rates Probabilities for July

Looking ahead, the market bumped up the odds of a 75 basis point hike in July as well.

Let’s look even further ahead.

Target Rate Probabilities December

The median expectation is for the Fed Funds rate to be 3.75-4.00% in December.

Wow. It will be massive stagflation and stock market carnage if that is even in the ballpark.

Over Twenty Million Households Struggle to Pay Energy Bills

Meanwhile, Over Twenty Million Households Struggle to Pay Energy Bills, and it will get worse.

If we even get to 3.0% I think the Fed will already overshot neutral. 4.0% could start a second “Great Recession”.

Where’s Neutral?

Forget about finding neutral. We will not have any idea until we see the fallout from a recession.

Neutral might easily be 2.0% given all this debt.

The problem is the Fed is always chasing its tail, compounding things with asymmetric policy while neutral constantly evolves!

— Mike “Mish” Shedlock (@MishGEA) April 20, 2022

In Search of Neutral

For discussion of “neutral” please see The Fed Searches For the Neutral Interest Rate, Where the Heck Is It?

Based on the CPI and Fed recent talk, I now expect that rarest of rare Fed policy error, tightening too much.

This post originated at MishTalk.Com.

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35 Comments

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Oldest Most Voted

RonJ

4 years ago

“Given this is a Fed quiet period it’s not due to official Fed yapping.”

I read that it came from the FED whisperer at the WSJ. Who whispers in his ear?

RonJ

4 years ago

It seems as if things have never been more screwed up, than they are now. The world never shut down the economy because of a treatable virus, before. Since, we have seen all kinds of extremes, including a negative price for oil.

A week or so ago, Denninger said the FED needed to raise the FED rate 2.00%, NOW. Suddenly, a few days before the meeting, .75 is being thrown around, with some even saying 1% is not out in left field. Inflation was supposed to be transitory, now it is running 8%.

KidHorn

4 years ago

I doubt the FED would hike 75. 50 at the most. I still think they’re more concerned about the stock market than inflation.

bayleaf

4 years ago

A jump from 23% to 95% odds in one day just means one thing… those calculations are garbage.

Mish

4 years ago

Reply to bayleaf

They are not garbage – They reflect actual bets with real money

That does not make them correct

Lisa_Hooker

4 years ago

Reply to Mish

Ah, the difference between true prognostication and gambling.

randocalrissian

4 years ago

3% if a “paltry ~ one trillion” of interest carry. Have a shovel, JPow. Good luck to ya.

Tony Bennett

4 years ago

2yr 10yr 30yr yields running neck and neck … with 1yr charging hard.

I’ll tip my hat to Jay Powell if he manages to get 1yr and 30yr to invert.

Tony Bennett

4 years ago

Will Michael Saylor face a margin call this week? Bitcoin getting close to $21K.

If so, things will get interesting in crypto world. FAST.

Cocoa

4 years ago

Reply to Tony Bennett

Crypto is basically just another asset class going down the tubes with the rest of them

Tony Bennett

4 years ago

Federal Reserve cornered with no good options. Policy error was made coming out of GFC … and doubling down at every opportunity.

Yellen with her “don’t see another financial crisis in our lifetime” underscores the hubris central bankers possess (or should I say “possessed”?) of managing risk.

A lot of things don’t matter, till they do.

Return OF Capital now at the plate.

Scooot

4 years ago

I think they’ll do what they said and stick to 50s in the near term, and let the market know they’re likely intentions for the rest of the year. They’re trying to retain/regain credibility so they want markets to believe they’re serious about fighting inflation but also don’t want to inflict sudden surprises. Had there not been the recent rout in bonds and sell off in equities, they might still have taken the view markets didn’t believe they were serious about inflation, but it’s clear that’s not the case at the moment.

bobcalderone

4 years ago

Reply to Scooot

My sentiments exactly. If Powell is so reliant on forward guidance, I don’t think the Fed will surprise the market with a bigger rate increase.

radar

4 years ago

Reply to Scooot

I also believe they know inflation is driven by energy and raising rates will not bring that down so sticking with 50 makes sense.

Scooot

4 years ago

Reply to radar

Yes I agree, but they’ll be lots of inflationary pay demands whilst there’s high employment. We’re starting to see that now in the UK. So I do think they’ll want to slow the economy to prevent a wage price spiral getting out of hand and prolonging inflation.

Scooot

4 years ago

Reply to Scooot

Got that wrong!

8dots

4 years ago

NQ 50% retracement of covid low – of the move from Mar 2020 low to Nov 2021 high – is good enough for JP. Options :

1) NQ to a new all time high in 2022.

2) NQ weekly : after several failed attempts to close > Nov 22 high ==> a plunge to test Mar 2020 low – a covid correction – before

moving higher, closing > Nov 22 2021 high, up to a new all time high until, at least Q3 2023….

3) The big trend from 2009 ==> the big change, the 3 of 3, not today…

8dots

4 years ago

NDX relief rally because the Fed will not make the rarest of rare policy mistake. Why :

1) The 2Y/10Y might invert.

2) It will further strengthen the dollar. With a strong dollar we can buy more stuff from China and Vietnam.

3) NDX will further plunge. Good enough to cool the crazy traders.

4) RRP, JP main weapon, is up to $2.2T, sucking more liquidity from the banks, starting a year and a half ago, but economist are stuck in the 70’s….expecting 21% FedRate, Volcker rates.

Nuddernoitall

4 years ago

From Goldman Sachs chief economist Jan Hatzius

“We have revised our forecast to include 75bp hikes in June and July.

I probably would have thought 75bp hikes were a good possibility in June and also in July until I saw the comment from Goldman’s Hatzius. So, my guess is absolutely NO 75s in June and July.

Robbyrob

4 years ago

When will depositors start shopping for higher rates? https://www.americanbanker.com/news/when-will-depositors-start-shopping-for-higher-rates

vanderlyn

4 years ago

never before has the FED broadcast their intentions so clearly the past 6 months. to jack up rates to try and crush inflation. the only surprise is so many bad traders ignored this.

Casual_Observer2020

4 years ago

No wonder Saudi Arabia won’t cooperate. This story went completely under the radar. It provides a confirmed connection between Saudi Intelligence and the 9/11 hijackers 20 years after British intelligence seized the information.

https://www.cbsnews.com/news/911-hijackers-video-saudi-intelligence-official-omar-al-bayoumi/

KidHorn

4 years ago

Reply to Casual_Observer2020

It’s been obvious all along the Saudi’s played a large part in 9-11. That’s why they were so adamant about attacking anyone who accused them of wrong doing. Reminds me of how the democrats, and a few republicans, are adamant about attacking anyone who questions the 2020 election.

Zardoz

4 years ago

Reply to KidHorn

Laughter isn’t an attack. You should laugh with us, instead of insisting on being the butt of the joke.

killben

4 years ago

I do not think a Fed hike of 75 bps is out of the realm of possibility even for this “Timid & Cowering” Fed.

Probably because of CPI print, political pressure, preserving credibility and the curse of reserve currency in reverse (you cannot have runaway inflation).

The other interesting question would be – If the Fed hikes to 75 bps, what happens to the YEN?

You can blame the clowns who run the show in the US, UK and EU for this mess.

Maximus_Minimus

4 years ago

Reply to killben

Yes, reserve currency with ~10% inflation isn’t a reserve currency, but then, what with renewable dollar debt that suddenly has a higher yield?

killben

4 years ago

Reply to Maximus_Minimus

Higher interest rate on debt is also an issue. But inflation is the fire tht is right¢er that needs to be attended to first. After all when you have a mess of this proportion you cannot tackle all at once

Maximus_Minimus

4 years ago

Reply to killben

Paging Dr. Bernanke, but he is not answering his pager…

randocalrissian

4 years ago

Reply to Maximus_Minimus

Burn after “Leading”

PapaDave

4 years ago

I rarely pay attention to the Fed. I think that their importance is often overrated.

They cannot produce necessities like food and energy, yet people blame them for high prices caused by shortages of those commodities.

Still, markets often over react to their statements and decisions, so I guess I should thank them for the volatility in markets.

JeffD

4 years ago

Neutral is at least 3.5% at this point. The genie is out of the bottle.

Sunriver

4 years ago

I’ll take the under. 2.75% by the end of 2022. 4% and no QE could indeed bring 30 year mortgage rates to 7.5% and Car loans north of 10%.

I don’t see that happening. After September the FED will halt.

Just a prediction.

But at the same time, predictions will not help the fact that we are already in a recession.

MPO45

4 years ago

Looks like the “faith” in the Fed to go higher and higher is finally coming to fruition. Remember not too long ago no one believed the Fed would hike so much and so fast? Those were the good old days. Wasn’t all debt supposed to become unserviceable?

Well here we are….

radar

4 years ago

Reply to MPO45

The fed is hitting the ball back in the court of congress. If the debt becomes unservicable, it will be up to congress to raise taxes and/or cut spending to service the debt. One way or another the pain is coming for running up so much debt. Hard to believe our government spends like a stupid teenager with a credit card.

KidHorn

4 years ago

Reply to MPO45

The FED hasn’t done much of anything yet. It’s pretty much all talk and little action so far.

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Will the Fed Pull the Trigger on a Pair of Three-Quarter Point Hikes?

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