Date: 08/16/2023
Author: Mr. X
It’s long been my suspicion the Fed is A-B testing. Different Fed officials have taken on roles as inflation hawks or doves and float proposals to seek how the market reacts. Meanwhile, Federal Reserve Chairman Jerome Powell largely keeps to himself until after the decision is made – and what that decision is probably depends on how the market and public opinion reacts to various Governors’ statements.
According to the latest minutes released, more interest rate increases have not been ruled out. “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” it read. That was a major shot across the bow of the current bull market, which has been showing its first real signs of weakening over the last two weeks.
If the Fed does end up torpedoing the market, its remarkably ambitious inflation target is probably to blame. A two percent rate seems wildly unrealistic given current circumstances. Nontheless, that’s what they are going with. “In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time,” it read. However, the document containing the discussion minutes showed real disagreement about what should be done next – evidence that the Fed may be testing the reaction. Even as the Fed highlighted its dedication to meeting the inflation target, it took care to show that it was aware of the risk. “Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening,” it read.
Consider some of the games Fed Governors have been playing lately. According to Governor Michelle Bowman on August 5, more rate increases are probably needed. “Given the strong economic data and still elevated inflation, I supported the FOMC’s decision in July to further increase the target range for the federal funds rate,” she said. “I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2 percent target.” Rate decreases were not mentioned. Even when she was supposed to be saying that the Fed would keep its options open, the hawkish tone didn’t change.
It’s important to reiterate that monetary policy is not on a preset course. My colleagues and I will make our decisions based on the incoming data and its implications for the economic outlook. We should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled.
However, New York Fed President John Williams seemed to suggest that hikes are already about as high as they need to go. “I do think that we are moving to an environment already where the underlying inflation rate has come down quite a bit,” he said. He said that “I think we’re pretty close to what a peak rate would be.” More than this, he even suggested that to “keep maintaining a restrictive stance may very well involve cutting the federal funds rate next year.”
Philadelphia Fed President Patrick Harker has also staked out a position as a dove. “I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” he said. He said that should only change if there is “alarming data between now and mid-September.”
Markets currently overwhelmingly favor that the Fed will hold rates steady next month. This is extremely dangerous – opinion is divided, and the Fed is steady extremely focused on inflation. If the market can fend off the current bearish trend, that is only going to increase the chances the Fed will throw us a curve ball. The consequences would be disastrous. Remember, economics is about expectations – and the Fed is not trying to adjust the flow of capital so much as the public mood.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing
