Fed Update | Is A Bottom In?
‘We are now at levels broadly in line with our estimates of neutral interest rates, and after front-loading our hiking cycle until now we will be much more data dependent going forward.’’
- Jerome Powell, July 24, 2022
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Executive Summary:
The Fed attempted to assuage the market to give them some elbow room to continue to raise rates while not causing a recession. But inflation is killing discretionary spending while businesses cut back due to bloated inventory.
Powell is hurrying to tighten before the recession because the political and market pressure to slow or even reverse the tightening will rise substantially once the labor market turns.
Expect another 1.0% of hiking through the rest of the year (50 bps Sept and 50 bps in Dec). And that's conservative. We may be in a technical recession now. After that, we will be in a real one. I expect it could happen as soon as Q4.
That means we are likely to see a nice bear market rally continue for the remainder of the summer but as CPI fails to fall as fast as people expect, the Fed will likely have to push up the terminal rate and cause a more moderate recession. That will likely cause markets to retest and probably break through those mid-June lows later this year. Just my thoughts.
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