By Kelvin Lee, Alonso Munoz
We expect the Fed to hike rates by another 25-basis points at today’s July meeting. Just a reminder, we (rates) are already in restrictive territory, and today’s decision will bring the FOMC target range up to 5.50%. Since the beginning of this tightening cycle, the Fed has raised rates 550 basis points in an 18-month period. RIP First Republic and SVB…
Today’s hike takes us back to 2007 interest rate levels…right before the great financial crisis. Are we finally at the end of this painful monetary tightening? We think so. It has been a long road since March of last year.10 rate hikes, a bear and bull market, failed U.S. Banks, the infamous FTX collapse, mortgage rates at 8%… Frankly, there isn’t much out there that can surprise us anymore.
Recall the federal reserve’s dual mandate, price stability and maximum employment. CPI has dwindled significantly since last July, coming down from 9% to 3%. Besides shelter costs, most prices have fallen significantly. Goods and commodity prices have stabilized for the consumer, and capital spending is now more focused on services. While yes, we aren’t at the fed’s “2%” target, we are close, and close enough in our opinion for the central bank to hold off on additional hikes to avoid recession risks. The fed might ACTUALLY pull off what the pundits call a “soft landing” (a cooling of the economy without everyone losing their jobs, houses, and 401ks).
The decision to “skip” hiking at last month’s meeting was justified by the Fed as buying time to “asses the economy’s progress.”. Well, the eco data since then has shown softer inflation and jobs numbers. While many may critique Powell for speaking against market expectations, he is consistent in being data reliant. We think Powell sees the latest economic data as evidence that the economy is most likely headed for a soft landing and that the fed has stressed markets right before a breaking point. Coupled with pressure and increased conviction by other members to pause in June’ s meeting, Powell has an incentive to pivot policy direction during today’s speech. This hawk is starting to lose its talons.
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