Fed plans to raise rates as soon as March to cool inflation

[President Punxsutawney Phil]

Good thread
I have learned a lot.

Welcome to the forum!

[jaichind]

https://www.marketwatch.com/story/fed-isnt-ruling-out-75-basis-point-moves-forever-mester-says-11652198364

"Fed isn’t ruling out 75 basis point moves forever, Mester says"

Markets that were up over 1% fell to negative territory on this news.  The Fed's communications on what they plan to do are terrible this cycle.

April YoY CPI numbers are coming out tomorrow which are expected to be 8.1% which is a drop from March YoY CPI numbers but that will be a base effect with MoM still expected to be positive.  I suspect the Fed is hedging itself in case the numbers end up worse than expected.

[jaichind]

April YoY CPI came in at 8.3% which is lower than March YoY CPI of 8.5% but higher than the expected 8.1%.  There will be somewhat more pressure on the Fed.

[jaichind]

US equities futures which were up over 1% before the CPI numbers came out all go wiped out when the CPI numbers came out.  It is now in negative territory and heading lower.

What is also interesting is that April chain CPI YoY was up 8.1% just March chain CPI YoY.  Last few months the "gap" between chain CPI and regular CPI was large which means that the price surge was more limited to a set of items that there were alternative products that could be used as substitutes.  The closing of the gap between chain CPI and regular CPI means that inflation pressure is now getting more across the board, at least in the goods area.  The Fed is running out of arguments like "the inflation surge is because of X, once X is out of the way things will be back to normal" as the price increase are becoming more broad-based and likely self-perpetuating.

[jaichind]

Hopefully, now the Fed faces reality and put a 75 bp and in my view a 100 bp increase on the table for the next Fed meeting.  The market pricing clearly thinks this is the case (at least the 75 bp part)

[jaichind]

April YoY PPI at 11%  Market expected 10.7%.   Par for the course given recent trends

[Omega21]

Hopefully, now the Fed faces reality and put a 75 bp and in my view a 100 bp increase on the table for the next Fed meeting.  The market pricing clearly thinks this is the case (at least the 75 bp part)

So we should expect mid-term stagflation?

[jaichind]

Hopefully, now the Fed faces reality and put a 75 bp and in my view a 100 bp increase on the table for the next Fed meeting.  The market pricing clearly thinks this is the case (at least the 75 bp part)

So we should expect mid-term stagflation?

I would say that the equities markets are pricing in around a 50% chance of a recession next year.  I think if it falls another 5% or so then the chances of a recession next year is very high. 

[Omega21]

Hopefully, now the Fed faces reality and put a 75 bp and in my view a 100 bp increase on the table for the next Fed meeting.  The market pricing clearly thinks this is the case (at least the 75 bp part)

So we should expect mid-term stagflation?

I would say that the equities markets are pricing in around a 50% chance of a recession next year.  I think if it falls another 5% or so then the chances of a recession next year is very high. 

About what I assumed, although we might get the official "recession" as soon as next quarter.

Anyway, I have already started buying the dip a bit, but not sure how much I should leave for later. Think we could lose more than 10% to ATL from this point?

[Person Man]

Hopefully, now the Fed faces reality and put a 75 bp and in my view a 100 bp increase on the table for the next Fed meeting.  The market pricing clearly thinks this is the case (at least the 75 bp part)

So we should expect mid-term stagflation?

I would say that the equities markets are pricing in around a 50% chance of a recession next year.  I think if it falls another 5% or so then the chances of a recession next year is very high. 

About what I assumed, although we might get the official "recession" as soon as next quarter.

Anyway, I have already started buying the dip a bit, but not sure how much I should leave for later. Think we could lose more than 10% to ATL from this point?

I know I am.

[jaichind]

About what I assumed, although we might get the official "recession" as soon as next quarter.

Anyway, I have already started buying the dip a bit, but not sure how much I should leave for later. Think we could lose more than 10% to ATL from this point?

The way the inventory cycle works makes the chances of official recession unlikely next quarter.  Still, economic growth clearly is slowing down.  There is still some reason to believe that when the likely recession comes it will most likely be more shallow than 2008 and more on the order of 2001.  Right now inventory levels are not that high and the usual reason why recessions are deep is large inventories that companies then burn through while they lower production.  This time around this factor will work in favor of shallow inflation.  The Fed still has dreams of holding down unemployment while rates rise to push down inflation.  This just seems unlikely and the Fed should accept reality and not risk a even worse recession and unemployment later down the line.

[jaichind]

Now Powell Reiterates 50 bp Hikes Are Likely in June and July. Sigh.  the Fed communications on this are all over the place and this signals significant divisions within the Fed.

[jaichind]

University of Michigan Consumer Sentiment Index continued to stay at a very depressed level.  It is at the worst level since the early 1980s with the exception of being slightly above late 2008-early 2009 levels (Great Recession) as well as the Summer of 2011 (Budget crisis).

[jaichind]

University of Michigan Current Economic Conditions Index  came in at 63.6.  The only 2 months that were worse than this since 1980 is Oct 2008 and Nov 2008.  Every other month over the last 42 years is better than this reading for May 2022.

[○∙◄☻¥tπ[╪AV┼cVê└]

University of Michigan Current Economic Conditions Index  came in at 63.6.  The only 2 months that were worse than this since 1980 is Oct 2008 and Nov 2008.  Every other month over the last 42 years is better than this reading for May 2022.

A stock market bear market, 8% inflation, record high housing prices, and a slowing economy is an amazing combination of things that aren't supposed to all happen at once.

[jaichind]

University of Michigan Current Economic Conditions Index  came in at 63.6.  The only 2 months that were worse than this since 1980 is Oct 2008 and Nov 2008.  Every other month over the last 42 years is better than this reading for May 2022.

A stock market bear market, 8% inflation, record high housing prices, and a slowing economy is an amazing combination of things that aren't supposed to all happen at once.

Many people do not remember this but inflation was a major concern in late 2007 and most of 2008.  The Fed fund rate had to hit 5.25% in late 2007 and in July 2008 CPI YoY hit 5.6%.  I remember food prices were surging in early 2008 and inflation became a bigger concern which all were erased by the economic and financial crash of late 2008.  Just to be clear, the markets started to fall in late 2007 and had fallen over 20% from their peak by July 2008 before the big crash in Sept 2008.  At the same time unemployment in late 2007 was around 4.6% which was fairly low.

So today really looks a lot like mid-2008 in many ways with the exception that the Fed funds rates today are way behind the curve relative to 2007 2008.

[jaichind]

https://www.nytimes.com/2022/05/16/business/ben-bernanke-predicts-stagflation.html

"Ben Bernanke Sees 'Stagflation' Ahead"

Former Fed Chairman Bernanke said Fed leaders were too slow to react to surging U.S. inflation and as a result face a period of stagflation or a combination of stagnant growth and high inflation.

[jaichind]

https://news.yahoo.com/goldman-sachs-economist-slowdown-consumer-spending-151957462.html

"Goldman Sachs economist sees 'a slowdown in consumer spending'"

The same GS economist Jan Hatzius also said in an interview with Bloomberg said "Borrowing is going to be a short-term driver of spending, and I think has been to some degree" and "Consumer spending is going to be relatively slow. Income is going to be quite weak in 2022."

It seems if consumers are using leverage to deal with inflation then the economic slowdown is going to be worse than expected.  The Fed is riding the tiger and now it is getting harder and harder to get off.

[jaichind]

Walmart and now Target's profits both fell well short of expectations and had deep stock price declines.  So there goes the "inflation is high because of greedy capitalists/corporations" line.  Of course, that line never made since I am pretty sure capitalists/corporations were greedy before 2021.

[jaichind]

Fed Reverse Repo Facility Demand Jumps to a record $1.973 trillion.  This pretty much shows there is excess liquidity in the system as market players run out of places to stash short-term cash.    Another data point points to the need to drain liquidity from the market via aggressive raises in the Fed fund rate as well as unwinding the massive Fed balance sheet.  When that does happen the long term cost of the Federal debt will become clear there will have to be a fiscal adjustment as well after the economic downturn is over.

[Person Man]

The good news is that consumers are finally saying “enough”.

[jaichind]

Revised 2022 Q1 QoQ GDP came in at -1.5% from the initial -1.3%.  What is striking is that net exports knocked 3.2% off this figure which implies very robust demand but supply that cannot keep up with demand.  

Ever since 2008, the Fed has been operating under the assumption that real GDP is operating below potential GDP ergo ultra-loose monetary policy is needed to get demand to meet up with potential GDP.  The low levels of inflation, which is also about deleveraging from the 2007-2008 bubble, seem to validate the Fed assumption.

The latest GDP numbers seem to indicate a massive policy miss collectively by the Fed, Trump administration, Biden administration, and congressional leaders of both parties.  The COVID-19 lockdowns seem to have permanently lowered USA's potential GDP trajectory while all policy makers  
assumed that the post-2008 world where demand was always below potential GDP.  The result is the current inflationary crisis which now can only be solved by normalization of interest rates to a pre-2008 norm.

[Person Man]

Revised 2022 Q1 QoQ GDP came in at -1.5% from the initial -1.3%.  What is striking is that net exports knocked 3.2% off this figure which implies very robust demand but supply that cannot keep up with demand.  

Ever since 2008, the Fed has been operating under the assumption that real GDP is operating below potential GDP ergo ultra-loose monetary policy is needed to get demand to meet up with potential GDP.  The low levels of inflation, which is also about deleveraging from the 2007-2008 bubble, seem to validate the Fed assumption.

The latest GDP numbers seem to indicate a massive policy miss collectively by the Fed, Trump administration, Biden administration, and congressional leaders of both parties.  The COVID-19 lockdowns seem to have permanently lowered USA's potential GDP trajectory while all policy makers  
assumed that the post-2008 world where demand was always below potential GDP.  The result is the current inflationary crisis which now can only be solved by normalization of interest rates to a pre-2008 norm.

We were kind of on our way before the pandemic. Didn't we get up to 3%? We were at 5% before right?

[jaichind]

Revised 2022 Q1 QoQ GDP came in at -1.5% from the initial -1.3%.  What is striking is that net exports knocked 3.2% off this figure which implies very robust demand but supply that cannot keep up with demand.  

Ever since 2008, the Fed has been operating under the assumption that real GDP is operating below potential GDP ergo ultra-loose monetary policy is needed to get demand to meet up with potential GDP.  The low levels of inflation, which is also about deleveraging from the 2007-2008 bubble, seem to validate the Fed assumption.

The latest GDP numbers seem to indicate a massive policy miss collectively by the Fed, Trump administration, Biden administration, and congressional leaders of both parties.  The COVID-19 lockdowns seem to have permanently lowered USA's potential GDP trajectory while all policy makers  
assumed that the post-2008 world where demand was always below potential GDP.  The result is the current inflationary crisis which now can only be solved by normalization of interest rates to a pre-2008 norm.

We were kind of on our way before the pandemic. Didn't we get up to 3%? We were at 5% before right?

This is where Brookings thought the USA was relative to potential GDP in early 2021



Clearly, they and the rest of the policy-making establishment were wrong.  Potential GDP clearly shrank during the 2020-2021 period.

But looking at the chart it is clear that the Trump tax cut of 2017 plus loose monetary policy most likely closed the GDP to potential GDP gap by the end of 2019.

[Frodo]

It looks like those interest rate increases are working, finally:

Cooling U.S. Inflation Builds Case for September Slowdown in Fed Rate Hikes