- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
- Long Term Employment Shifts Caused by the Pandemic
- Earnings Provide Positive Surprise Despite Pandemic
- Renewable Energy Under Fire in Texas
- Yellen Aims for Full Employment
- Minimum Wage Research in the Spotlight as a Hike Looks Inevitable
- Non-Residential Construction Soft in the Pandemic Economy
- Views on Interest Rates and the Move in Treasury Yields
- Inflation Indicators Healthy but Still on the Rise
- Risky Assets Sell-off Despite Optimistic Economic Outlook
- The Latest on Vaccinations and What it Means for Growth
- Highlights of the Fed's "Economic Well-Being of U.S. Households in 2020" Report
- Relative Factors and Forward Change in Federal Funds Rate
- Can Wage Growth Keep Up With Inflation?
- With That, We Carry On
- Supply Pressures Looking to Peak
- Cars are Still Expensive, Workers are Still Needed
- Recovery Continues, but Delta Looms
- Fed Eyes Tapering While China Sees a Setback
- Review the Fed Previews
- No Tapering Yet
- Labor Day on Labor Day
- Delayed or Disappearing Growth?
- Supply and Demand Mismatch will be Evident during the Holiday Shopping Season
- Workers Find Leverage in a Tight Labor Market
- Cautiously Optimistic
- Sour Expectations Take Down the Market
- Q3 Earnings Were Surprisingly Good
- Inflation Weights on Bonds and Consumer Sentiment
- FOMC Tapers While Trade and Employment Flash Mixed Signals
- Inflation is Getting Broader, Not Cooler
- Unemployment Insurance During the Pandemic
- A Year of Normalization
- What Will GDP Growth Look Like in 2022?
- Student Loans Targeted by the Biden Administration
- The Chicago Fed Index Reverses in July
- Chinese Economic Data Faltered in July
- Stellar Jobs Report Bucks Recession Fears
- Bank of Japan Punished for Dovish Policy Stance
- Expect 75 Today
- Manufacturing Weakness in Germany has Implications for Euro Area Growth
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.