Image from ECB Forum on Central Banking

Consecutive Rate Hikes Aren’t Off the Table

Please note Powell Says Consecutive Rate Hikes Aren’t Off the Table

When asked during an appearance at the annual ECB Forum on Central Banking on Wednesday if the U.S. can expect an increase at every other meeting of the central bank, Powell said officials haven’t made a conscious decision to go that route. “That may work out that way, it may not work out that way—but I wouldn’t take moving consecutive meetings off the table at all,” he said.

Bringing inflation in line with the Fed’s 2% target is going to be a long process, Powell warned. “I don’t see us getting back to 2% this year or next year [on core inflation],” Powell said, adding that he sees the U.S. making steady progress on headline inflation, but that core inflation—which strips out food and energy costs—is slower. “I see us getting there the year after.”

“We will be restrictive as long as we need to be,” Powell said. “If inflation is coming down sharply and we’re confident that it’s on a path to 2%, that would be a different situation—you would begin to think about loosening policy, but we’re a long way from that.”

Not This Year or Next Year

Powell does not expect core inflation to get to the Fed’s 2.0 percent target this year or next. If he is accurate, we are discussing 2025 at the earliest.

Higher for longer keeps getting both higher and longer, at least according to Powell. The market expectation is a big yawn.

Interest Rate Probabilities for December 2024

(Click on image to enlarge)

Target rate odds courtesy of CME Fedwatch

The median interest rate expectation for December 2024 is roughly 4.0 percent. Currently, the Fed’s target rate is a range of 5.00 to 5.25 percent with an 81.8 percent chance of another 25 basis point hike in July to the range of 5.25 to 5.50 percent.

Betters now believe the Fed will not start cutting rates until March of 2024. Longer keeps getting longer but starting March of 2024, the market has penciled in a lot of rate cuts from 5.25 percent all the way to 4.00 percent by December.

Let’s Play What If?

Assuming the market forecast is correct, the Fed will be aggressively cutting rates heading into the next presidential election on Tuesday, November 5, 2024.

That’s not necessarily good for Democrats because it implies recession in an election year, typically not a good thing.

Assuming the Fed forecast is correct, inflation will then be higher longer than the market expects. If recession hits at the same time, the economy will be in a state of stagflation heading into an election, certainly not good for incumbents.

The goldilocks scenario is one in which inflation lowers to the Fed’s target, slowly, steadily, and with no recession or huge job losses.

It’s far to early to make a guess on anything other than to suggest goldilocks is not a likely setup. But that is what the equity market seems to believe at the present.

One of the problems for the Fed is that Biden’s energy policies are highly inflationary.

Inflationary Policies

• Please note that Ford Gets a $9.2 Billion Cheap Government Loan With Inflationary Strings Attached. So not even $9.2 billion is enough to make Ford profitable.
• The Inflation Reduction Act Price Jumps From $385 Billion to Over $1 Trillion.
• Hoot of the Day: The UAW Demands a “Just Transition” to Electric Vehicles

And no one yet has factored in the cost of minerals to make the batteries. EVs will not go from 3 percent of sales to a Biden-mandated 67 percent with the price of the needed metals and rare earth elements to stay flat.

For discussion, please see Critical Materials Risk Assessment by the US Department of Energy

Yep, Biden’s own energy department is issuing mineral warnings.

All in all, Biden has a brilliant plan on numerous fronts simultaneously, to create more inflation, just what the Fed wanted for years, but now doesn’t.

More By This Author: