As we all know, there is a debate going on in the market about whether or not inflation has finally started to recede and therefore the Federal Reserve can start to let up on the brake pedal and — this seems a stretch — even start lowering interest rates and easing monetary policy in the near future.
Right now, those who believe the Fed is done tightening are winning the debate, witness the sharp rise in equity prices over the past two months. But at the same time several Fed officials have been warning that they are not done tightening yet — not by a long shot — and that more rate hikes are in the offing.
Notably, Minneapolis Fed President Neel Kashkari said last week that “there’s a disconnect between me and the markets,” adding that it was “not realistic” that the Fed would be lowering rates in the next six to nine months.
St. Louis Fed President James Bullard was equally blunt, telling the Wall Street Journal that he would “lean toward” another 75-basis point rate hike at the Fed’s next scheduled meeting beginning September 20. He said he expects high inflation “to prove more persistent than what many parts of Wall Street think.”
Yet many investors don’t believe them.
Does this mean that the Fed needs to make a much stronger message about its intentions, or is it content to let the market do what it wants to do and suffer the consequences if it has misjudged? Or are these investors correct in their assumptions?
Throughout his tenure, Fed Chair Jerome Powell has been not only market friendly but also keen on making sure the market understands what the Fed is up to. He doesn’t want any surprises. So does this mean that he is ok with what the market is doing, or if it’s wrong in reading the Fed, does he need to make a much clearer message?
Later this week the Federal Reserve Bank of Kansas City will host its annual Jackson Hole Economic Symposium in Wyoming. That seems like a good time for Powell to make it more crystal clear what the Fed’s intention are. Continue reading "The Fed's Intentions"