Minutes Suggest 75 bps Hike off the Table, PCE Shows Some Relief of Inflationary Pressure

FS Insight Team

What will happen to household finances, consumer spending, and hiring as Federal Reserve Chair Jerome Powell raise interest rates to slow the economy and bring down inflation? That’s the fundamental question.

What we know is this: The core personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose 4.9% from a year ago in April, in line with estimates and a deceleration from March. This indicates that price pressures could be easing a bit, news that helped the stock market finish higher this week, snapping a nearly two-month losing streak in markets.

On Wednesday, minutes released by the Fed showed that policy makers agreed for half-percentage point increases in June and July, in line with previous communication. The market accepted the minutes as more dovish than hawkish. Half-point hikes were already priced in for the next couple of meetings and there was no mention of 75-basis-point moves that had become the base case for a few Wall Street banks at the end of April.

Plus, there are already signs that the U.S. economy is weakening. Of the last 19 major economic indicators, 13 have missed economists' expectations. Tom Lee, our Head of Research, believes inflation is cooling off along with the labor market, which could lead the Fed to shift policy adjustments to 25 bps increments. This would be favorable for Wall Street. 

The minutes released this week also indicated the job market remains strong despite economic activity slipping. Still, the Fed remains focused on bringing down inflation, which sits near 40-year highs. The minutes reiterated the Fed’s 2% target, noting: “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price increases.” The minutes noted, “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risk to the outlook.”

This month, Powell reaffirmed that the Fed would continue to tighten monetary policy until it sees “clear and convincing” evidence that inflation is dropping toward the central bank’s target of 2%. He remains hopeful the Fed can achieve a “soft or softish landing.” It was only three weeks ago that the FOMC hiked rates by 50 bps for the first time since 2000.

It’s also worth nothing that six of the past 15 tightening cycles following World War II didn’t lead to a recession. For the nine that did lead to a recession, it took about 30 months from the first hike to the onset of recession. All told, the 4.9% figure released Friday marks the 13th consecutive month the gauge has been above the central bank’s target range of 2%. Still, it was slightly below March’s measurement of 5.2% and is down from the 39-year high of 5.3% that was recorded in February, progress that could end up driving markets higher into the summer. Time will tell.

The FOMC will meet on June 14th and 15th. The yield on the 10-yr closed Friday at 2.743%. Quantitative tightening begins in June as well.

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