No Rate Hikes Coming Despite Tech Bubble

On Wednesday, the Fed will give us its decision on rates along with an updated look at its economic projections. It will be interesting to see where the Fed sees the unemployment rate going since it has fallen quickly, but the labor market is still very uncertain. We might see the Fed call for relatively low unemployment (mid-single digits), while still projecting zero percent rates. Obviously, the Fed won’t hike rates on Wednesday.

As you can see from the chart below, Cornerstone Macro shows the Fed’s dot plot won’t even project rate hikes in 2023. That’s a good prediction by Cornerstone Macro because current guidance is the Fed’s best monetary policy tool. It has nothing to do with giving an honest guess at where rates will be in 2023. It’s not crazy to think the Fed will raise rates by then, but it would be crazy for the Fed to say it will raise rates then because that would be hawkish guidance. It would send the market into an unnecessary tailspin considering the fact that inflation is low. If inflation spikes in 2022 and we have full employment, the Fed can raise rates then. There’s no reason to say it would do that at this meeting though.

The Fed is willing to keep rates at zero even with inflation above 2%. There won’t be hikes or even guidance for hikes if inflation is below 2% like it is now. The Fed probably could try to talk down speculation in stocks, but it’s tough to get the market to listen without being hawkish which it won’t do.

COVID-19 Changed Everything

COVID-19 caused the biggest shift in consumer spending ever. We had parts of the economy shut down and consumers flush with cash because of the stimulus. That was a temporary boon to some industries. As you can see from the chart below, the 6-month growth rate in durables spending minus the 6-month growth rate in services spending was the highest ever, going back to 1960. That’s a terrible shift because most people work in the service sector. The leisure and hospitality industry was decimated. On the other hand, there has been inflation in housekeeping supplies, appliances, and used cars & trucks due to the spike in demand.

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