SGH Insight
...Given the strength of the underlying economy – firms continue to add employees at a rapid pace, for example – the natural lags between policy and outcomes suggests September is still too early for a 25bp rate hike. But September could still be at a pivot point by signaling a 25bp hike at the next meeting. A transition back to a slower path of rate hikes would reduce the odds of a hard landing for the economy...
...Right now, it is beginning to feel like something of a sweet spot for the Fed where conditions have tightened enough to offer a path to trimming the demand side of the economy but not so much as to force a shift in the Fed’s rhetoric. That doesn’t mean the Fed won’t eventually need to bring rates even higher than current expectations, but it can potentially move more gradually later this year.
For now, it’s a waiting game for the Fed. Barring a market accident, the Fed is looking for clear and convincing evidence of a path to price stability to back down from 50bp rate hikes. The magnitude and speed of financial tightening will have an impact on growth. Reduced wealth due to lower equity and crypto prices, layoffs in tech as firms scale back and venture capital money dries up, higher interest rates on consumer lending, a stronger dollar, and slower global growth will weigh on spending, job growth, and, ultimately, consumer prices. But this will take some time. To be sure, the near-term data will be solid, it’s baked in the cake at this point. But we need to be looking toward the future; tightening cycles always have economic impact...
Market Validation
WSJ 5/17/22
Mr. Evans told reporters after his remarks that in terms of the pace of monetary policy tightening, he sees big moves that moderate into smaller ones as the year moves toward its close. “I’m expecting that before December, we will have completed in any 50s and have put in place at least a few 25s,” he said in reference to the basis-point size of those prospective actions.
Bloomberg 5/17/22
A top Federal Reserve official downplayed deteriorating liquidity conditions in financial markets, telling an audience Monday it was to be expected given rising volatility as investors grapple with uncertainty over global events and shifting U.S. monetary policy.
“In the global environment there’s a lot of uncertainty, and a lot of events happening. We’re also seeing our actions moving monetary policy, I think, in a very strong direction, to more normal rates,” New York Fed President John Williams told a Mortgage Bankers Association conference in New York. “Some of that volatility -- in say, the Treasury market -- is really the markets digesting that information.”
Signs of deteriorating liquidity in U.S. Treasuries, such as measures of market depth and bid-ask spreads, are “more or less in line with the increase in volatility in markets,” he said. “It’s just a reflection more of: A lot’s happening with market rates moving around, and therefore you’re seeing some of these measures of liquidity deteriorate somewhat, and pretty much consistent with past experience there.”
Williams’s comments echoed a semi-annual report on financial stability issues published on May 9, and were delivered amid a broad market downturn that has seen the S&P 500 index of U.S. stocks lose nearly 17% of its value since reaching a record high in the first week of the year.
The central bank is attempting to tighten financial conditions in a bid to slow the economy and bring down inflation from multi-decade highs. Policy makers authorized a half-point increase in the benchmark federal funds rate at the conclusion of their most recent meeting on May 4, marking the largest single hike since 2000.
Fed Chair Jerome Powell told reporters after the meeting that the central bank was on track to enact additional half-point increases at the next two meetings in June and July.
Williams said Monday such a plan “makes sense” as the Fed moves rates “expeditiously over this year back to more normal levels.”
“We do need to move -- again, the word is ‘expeditiously’ -- to more normal rates this year, and we’re on our way to do that. But we also need to watch, and we need to monitor what’s happening in the economy,” Williams said.
“We’ve already seen a tightening in U.S. financial conditions that is far greater than what we saw in all of 1994,” he added, referring to an episode where, under then-Chair Alan Greenspan, the Fed embarked on a surprise tightening campaign that led bond investors to sustain heavy losses.