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- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- A Breather for the Eurozone as Inflation Hits Two-Year Low
- Germany's September CPI Report: A Clearer Picture of Inflation Trends
- US Manufacturing Demonstrates Resilience Amidst Volatility in August
- The ECB Prepares to Address Excess Liquidity Through the MRR
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Chinese CPI Trying to Buck the Deflation Trend
- Energy Prices Rise but the Core Disinflationary Trend is Maintained in September
- PPI's Quiet Rise and the Energy Elephant in the Room
- Small Businesses Grapple with Inflation and Financial Strain in September
- A Wacky September Jobs Report Shows Strong Labor Market
- A Look at the Fragile US Labor Market Ahead of the Nonfarm Payrolls Report
- Thoughts on GME and This Week in the Stock Market
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- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
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Expect 75 Today
September 20, 2022
The FOMC is likely to hike by 75 bps in the September meeting as it continues to fight elevated inflation with a strong labor market and stable growth to back up the decision. Following the hawkish posturing at the Jackson Hole conference, Chair Powell will look to continue the hardline stance on fighting higher prices. The FedWatch Fed funds rate probabilities see an 82% chance of a 75 bps hike and just an 18% chance of a 100 bps hike with no expectations of a more dovish 50 bps hike.
The hawkish position was confirmed by a hot August inflation report that saw a significant rise of 0.6% MoM in the core CPI overshadow a small increase in the headline CPI of 0.1% (which resulted in the annual pace falling slightly). The monthly increase in core CPI included the new vehicle index up 0.8% MoM, the shelter index up 0.7% MoM, and the medical care index up 0.7% MoM. This negated two months of decline in the energy index which has put downward pressure on the inflation. Stickier categories are proving to be a problem for the Fed as demand for goods and services has not dropped off as sharply as policy rates have risen.
The market has taken these developments in stride with the two-year Treasury yield rising from 2.90% at the beginning of August to almost a full percentage point higher to 3.85% last week. The sharp increase is the highest since 2007 when the two-year yield was falling from its peak of just above 5% set in 2006. Investors are continually shying away from the idea that the Fed may pivot at the first sign of economic weakness. The implication of higher short-term rates could also point to expectations of a terminal rate above 4% which would suggest another 100-150 bps of hiking is still to come after the 75 bps hike in September.
The Fed can continue on this path with confidence because the labor market remains in a relatively strong position. The US added a solid 315,000 jobs in the month of August end the summer with a total of 1.13 million jobs added. The unemployment rate did tick up 0.2 ppts to 3.7%, but that actually was a result of positive developments in the labor force. The labor force participation rate grew 0.3 ppts to 62.4%, a significant move higher but still -1.0 ppts below the pre-pandemic level. The Fed will likely see that persistent labor demand is likely to cancel out the effect of growth in the labor force on wage growth.
In the end, the most important issue for FOMC members is the protection of Fed credibility (or for some, the re-establishment of Fed credibility). In his most recent speech on the economic outlook, FOMC Governor Christopher Waller insisted that bringing inflation down to 2% “is a fight we [the FOMC] cannot, and will not, walk away from.” These are stern words to use as a central banker and are intended to reduce uncertainty in the general outlook on monetary policy. With that being said, the Fed will move forward with 75 bps in September and look forward to a similar move in the next meeting.