Powell Takes Hawkish Tone at IMF Appearance, Fed Futures Expectations Rise

Chairman Powell appeared before the IMF, and he echoed a more hawkish tone that has been evolving in Federal Reserve commentary over the past weeks. He said he believed it was appropriate to move a little more quickly than his previous comments. Let’s remember that as recently as December the expectation was only for 75 bps of hikes for 2022. That’s now gone up to around 2.5%. The comments weren’t necessarily a surprise to the market. Powell’s words make it all but assured that the Central Bank will be raising by 50 bps at the May meeting. If there was any doubt about which side of the mandate the Fed will be prioritizing in the coming months, Powell made it clear when he said, “It’s absolutely essential to restore price stability.”

Correspondingly, hawkish Fed watchers have gone from advocating 50 bps hikes to advocating 75 bps hikes. Jeremy Siegel appeared on CNBC this morning and said the Fed should raise 75 bps and that it’s best to “take your medicine all at once.” Nomura said Friday that it expected the FOMC to raise 75 bps in June and July. This would bring an exceptionally high level of tightening in a short period of time. Remember the Fed only stopped buying assets last month! Other Wall Street firms will likely follow, as our Head of Global Portfolio Strategy Brian Rauscher notes, Wall Street Fed watchers will trip over themselves to be on the right side of the dove-hawk divide. He expects JPM and Goldman may be the next to raise their expectations to 75 bps along the lines of Nomura. Rates also continued rising on the news Friday while there was the broadest equity sell-off of April so far. 

Traders also priced in more hikes in the wake of Powell’s words. Fed Futures markets are now implying a high odds of a potential 75 bps hike in June. Bullard appeared earlier this week on CNBC and said that 75 bps certainly weren’t off the table for him. Prior to Powell’s speech at the IMF, even habitual dove San Francisco Fed President Mary Daly said she would be discussing whether hikes of up to 75 bps would be needed. The chief economist at Deutsche Bank thought this rate cycle could end with a Federal Funds rate of around 5%. This hasn’t been seen in over a decade. On the bright side, Loretta Mester from the Cleveland Fed said she did not favor 75 bps hikes and preferred more “methodical” rate hikes.  Her comments were a little late to prevent the bloodshed on Friday.

At the core of Nomura’s call is not that the Fed is committed to a 75-bps hike at this time, but rather that inflationary pressure will be persistent, and because of being data-dependent they will be forced into such a situation. According to Deutsche Bank’s chief economist, the incredibly tight labor market and rising inflation expectations are probably at top of mind. Given the likelihood of persistent pressure from the conflict with Ukraine, which former Chairman Yellen also said was likely today, they may have been swayed to the “shoot first, ask questions when inflation’s been down for 3-4 months” position that Brian Rauscher called weeks ago.

The good news is that the Fed’s jawboning is having the intended effect. Borrowing costs are up significantly across auto loans and different mortgage products. Used car prices and other sources of COVID inflationary pressure may be alleviating, but some associated with the interruption in the supply of key commodities from the Russia-Ukraine War may be only beginning. We are in a difficult environment for economic forecasters. Some voices are pointing out that the Fed may need to change its inflation target because of the high unemployment rate that might occur if the Fed were to actually get to its 2% target. Details will be provided on Quantitative Tightening at the May meeting. The benchmark yield on the 10-Year Yield was 290 bps.

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