What to make of Wednesday’s Fed meeting
Wednesday’s focus was the Fed’s policy announcement. The market expected the Fed would talk-up growth and inflation but leave policy unchanged. The final statement was mixed on growth but talked-up inflation while leaving policy unchanged.
Inflation is where the equity bears continue to focus. The key phrase was “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2% objective over the medium term.”
“Symmetric” is important because of what it may portend. The thinking is “symmetric” implies the Fed is willing to let inflation run hot. In other words, inflation has undershot their 2% target for so long it may be time to let it run over 2% for a commensurate amount of time. But, bear in mind, they must be careful not to let the economy overheat. Raphael Bostic of Atlanta (and a FOMC voter) has been a proponent of this idea.
Inflation has undershot for so long, letting it overshoot for an equal amount of time doesn’t make much sense… There’s potential for it to ramp rather quickly. So, the number one tool for fighting inflation in the Fed’s arsenal?
That’s right, rate hikes.
The bears are drawing lines saying this implies four rate hikes this year instead of the projected three.
Remember, the Fed has habitually not raised rates unless there is a press conference after the meeting. This year, there are press conferences after the June, September, and December meetings. So, it’s possible we could see three more rate hikes this year.
The market has already priced in a June hike so it’s a matter of September and December. Granted, this doesn’t mean they will hike four times, but the bears are saying there’s nothing in today’s statement to make you think they won’t.
The most recent “dot plot” chart (the path of future rate hikes) showed a bump from two to three hikes next year, but left this year unchanged at three. This year’s dot plot was one Fed governor short of moving the hikes to four. Given the inflation comments today, something tells me those chances just went up.
If that happens, the market won’t like it.
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