Moment of Truth Approaches on Federal Reserve Pick, Inflation Numbers Increase Pitch of Criticism, Clarida Resigns

The CPI data came in pretty hot and traders in the Fed Funds futures markets now seem to believe that a July interest rate hike is much more likely. The reading came in at a white hot 6.2% YoY change on an estimate of 5.9%. The implication is that rates have about 80% chances of being raised in July based on the futures market.

The curve is flattening in response to the hot numbers and generally some in the bond market still seem very convinced that the Fed is behind the curve. It is possible, however, that a more dovish Chairman nominee could mitigate some of these concerns.

As we’ve repeatedly brought up in the coming weeks, Powell’s shoe-in status for renomination as Fed Chairman has been diminishing. The steady string of legislative defeats for the progressive wing of the Democratic party has put a premium on Powell’s head as a potential peace offering to help assuage the internecine issues that have been log-jamming President Biden’s agenda.

The fact that Powell is even still a favorite, although losing momentum, is a testament to his demeanor as a consensus builder. Also, a major public spar with the man who first appointed him probably ingratiated him to the other side as well. Criticisms on the right primarily have to do with him not being hawkish enough on inflation...
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