- Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
- 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
- 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?
The Fed Forces Itself to Play Catch Up
June 16, 2022
The Fed hiked 75 bps in June after a strong May CPI report forced the FOMC to reconsider the 50 bps hike that was previously agreed upon. The markets which have been sensing the need for stronger a policy reaction had already priced in the move. In the debate on how large rate hikes should be, a 75 bps hike seems to be a fitting fence to ride between the 50 bps and 100 bps camps.
In fact, the June decision describes the economic situation as a whole as Chair Powell attempts to craft a soft landing of the US economy while tightening at a fast enough pace to combat inflation. That pace is a moving target that seems to shift with every CPI/PCE inflation report. It’s likely that the May CPI report played some part in swaying FOMC members to a 75 bps decision when 50 bps was the preferred move before.
While the sizing decision was important, the changes in the June version of the Summary of Economic Projections overshadowed it. There were large shifts in the views on GDP and inflation for 2022. The estimate of 2022 full year GDP growth was downgraded from 2.8% in March to 1.7% in June while the estimate of 2022 PCE inflation was upgraded from 4.3% in March to 5.2% in June. The shift is in line with the FOMC’s thinking that tightening will have to happen at a quicker pace.
The truth is, if the Fed is to follow through with its desired tightening path, it will have to leave behind any hopes of a “gradual” return to normal. The chart points out how the Fed has forced itself to play catch up by increasing the forecasted 2022 Fed funds rate at a faster pace than it has increased the actual rate. This has led to a higher “implied average pace of rate hikes per meeting” in the last four meetings. The inability to maintain a narrative on pacing provides evidence to those calling for the Fed’s credibility to be questioned. But the past few months have been uncertain times, and it would have been hard for anyone to foresee a Russian invasion of Ukraine or an outbreak of COVID-19 in China.
Another interesting thing to note in the Fed projections is the mismatch between the Fed funds rate projection and the core PCE inflation projection revisions. As mentioned above, the FOMC issued a large upgrade in its forecasted 2022 Fed funds rate (up from 1.9% in March to 3.4% in June) which was largely expected as a response to managing inflation expectations that are expected to have risen in the past months. However, the Fed did not feel the need to upgrade its view on core PCE inflation for 2022 with just a 0.2 ppts increase over the March projection in June to 4.3%.
The core PCE price index is sometimes noted as the “Fed’s favorite inflation measure,” so one would think that it would guide policy the most. In the March projections, both the Fed funds rate and core PCE inflation projections rose at a similar pace, intimating that FOMC members were reacting to core inflation. However, that message is not reflected as strongly in the June projections. It seems that the spikes in food and energy inflation may appear to the FOMC as persistent so members may feel like they need to address it through rate hikes.
The July meeting is around the corner and hawkish tones remain the theme amongst markets, central banks, and investors. Given that the summer is going to be one of hot prices, 75 bps might be on the table again with 50 bps looking like a more dovish option. The Fed finds itself playing catch up and speed is the only way to return to a sense of normalcy.