Fed-Speak Reassures 75bps in November

October 20, 2022

Yesterday, Federal Reserve Bank of St. Louis President James Bullard said the Fed will not be deterred by declines in the stock market nor is he concerned about financial strains in the economy. In fact, he said, it’s?“good news”?that the market continues to anticipate further aggressive action from the Committee and thus, it’s paramount the Fed follows through with additional rate hikes. Speaking to Bloomberg TV, he said,?“It is a great time to be fighting inflation and it is a great time to try to nip inflation in the bud...while the labor market is strong,”

The comments from Bullard follow earlier comments from Minneapolis Fed President Neel Kashkari. On Tuesday, Kashkari cautioned that the Fed may not be able to pause rate hikes even at 4.75% should inflation remain elevated. Speaking in a discussion on the economy at a Women Corporate Directors Minnesota Chapter event, Kashkari said,?“If we don’t see progress in underlying inflation, or core inflation, I don’t see why I would advocate stopping at 4.5, or 4.75, or something like that.”?“Core services inflation,”?he added,?“which is the stickiest of all, keeps climbing, and we keep getting surprised on the upside.”

Recall, in the latest September CPI report, the core CPI, which excludes food and energy, rose higher from 6.3% to 6.6%, reaching a new cycle peak.?

While Kashkari is a non-voting member this year and Bullard is a voting member, both are notable hawks, and their commentary is a clear reminder to investors not to get too complacent regarding the Fed’s latest forecast as the economy continues to evolve and policy makers will respond accordingly. After all, the Fed has consistently revised higher its expectations for the terminal rate, gaining from 2.8% as proposed in March to 4.6% in the latest September Summary of Economic Projections (SEP).

Keep in mind, the Fed’s expectations are based on a marked decline in prices back down nearer 2% by 2023. However, as Kashkari and Bullard have noted, inflation continues to surprise to the upside, underperforming relative to Powell and Co.’s expectations.?Thus, from here, policy makers will likely be forced to take a more aggressive stance to reinstate price stability, 1) raising their outlook for rates in the December SEP, and 2) pushing to a higher terminal rate in 2023 than currently anticipated.?

At this point, the market is pricing in a 75bp increase in November at a 97% probability with a fifth-round 75bp increase also a possibility at year-end, currently priced in at 79%.

As inflation remains stubbornly elevated, federal officials in Washington are also on their heels searching for near-term solutions to price pressures weighing on consumers, and more importantly, voters as the mid-term elections approach.

According to reports, oil sales from the U.S. Strategic Petroleum Reserve were extended into December after initially poised to end in November. Of course, to be fair, while the time frame for sales continues to be prolonged from the original end date initially indicated back in March of this year, at least the next 15M barrels are reportedly part of the original 180M barrel release authorized in the first quarter.

According to the U.S. Energy Department, the Biden administration has released 165M barrels form the Strategic Petroleum Reserve (SPR), accounting for roughly 29% of the initial reserve holding as of March of this year, leaving just 405M barrels for emergency measures, the lowest level since 1984.

While a short-term fix, the release of 165M barrels has worked to bring down gasoline prices from a recent high of $5.02 on average reached in June to $3.70 on September 23. Of course, more recently, prices have reversed course moving back up to $3.84, as of October 19, underscoring the ongoing pressure consumers are facing filling up their car with higher priced fuel.

Yesterday, mortgage applications declined for the fourth consecutive week, dropping 4.5% in the week ending in October 14 after a 2.0% decline the week prior.

Additionally, yesterday, housing starts dropped 8.1% in September, pulling the annual pace down from 1.566M to 1.439M, a two-month low. Starts were expected to fall 7.2%, according to the median forecast on?Bloomberg. Single family starts fell 4.7%, and multi-family permits dropped 13.2%. Year-over-year, housing starts fell 7.7% in September, the fifth consecutive month of decline. On a regional basis, starts fell in three of the four regions of the country in September. Starts declined 12.5% in the Northeast, 2.7% in the Midwest and 13.7% in the South. However, starts rose 4.5% in the West.

Building permits, on the other hand, rose 1.4% in September, pulling the annual pace up from 1.542M to 1.564M, a two-month high. Building permits were expected to decline 0.8%, according to?Bloomberg. Single family permits fell 3.1%, while multi-family permits rose 7.8%. Year-over-year, building permits declined 3.2% in September following a 13% drop in August.

Bottom Line:?Housing was a sizable bright spot for the economy as the economy was climbing out of the Covid recession. However, with consumers increasingly unable or unwilling to make a large-ticket purchase such as a home, residential investment has already declined markedly, down 3% in the first quarter and off nearly 18% in the second, shaving off almost a full percentage point from topline growth, weakness which will only be presumably compounded as the Fed continue to hike rates.

This morning,?initial jobless claims unexpectedly fell 12k from 226k to 214k in the week ending October 15, a three-week low. Jobless claims were expected to rise to 232k, according to?Bloomberg. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.36M to 1.39M in the week ending October 8, a five-week high.

Also this morning, the Philly Fed Index rose slightly from -9.9 to -8.7 in October, a two-month high. According to?Bloomberg, the index was expected to rise to -5.0. In the details of the report, prices paid rose from 29.8 to 36.3, new orders increased from -17.6 to -15.9, and delivery time gained from -18.2 to -12.6 in October. Additionally, employment improved from 12.0 to 28.5, the highest reading since April. On the other hand, shipments fell to 8.6 from 8.8, and the six-month outlook dropped from -3.9 to -14.9 in October, the lowest since July.

Additionally this morning, existing home sales declined for the eighth consecutive month, falling 1.5% from 4.78M to a 4.71M unit pace, the lowest since May 2020. According to the median estimate on?Bloomberg, existing home sales were expected to drop 2.1%. In the details of the report, single-family sales fell 0.9%, and multi-family sales dropped 5.8%. Year-over-year, existing home sales declined 23.8% in September, the fourteenth consecutive month of decline. Despite a decline in sales, the months’ supply of existing homes remained at 3.2 months for the third consecutive month, averaging 3.2 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 8.4% in September from a year earlier to $385k, a six-month low.

Finally this morning, the Leading Index fell 0.4% in September, a tenth of a percentage point more than expected and following a flat reading in August.

Tomorrow, the economic calendar is empty.

-Lindsey Piegza, Ph.D., Chief Economist?