Hawkish Fed
Higher interest rates for a longer time
Here are the key takeaways of US Fed September meeting:
Higher interest rates for a longer time
The US Fed took an?indirect way?to shock the market. It stuck to the market expectations of raising interest rate by 75 bps. This is the status quo that I expected:
But what caught the market by surprise is that it?raised the dot plot significantly. The key 2023 median dot was raised to 4.625%. This is?much higher?than the market expectations of 4.1% for the end of next year. Below are the details of the dot plots:
In other words, the US Fed is communicating to the markets that?interest rates are?heading higher and will stay there “for some time.”??This is in stark contrast to Fed Chair Powell’s loose monetary policy stance last year when he regarded inflation as ‘transitory’.
Volcker-esque Powell
Powell also stated that we are taking “forceful and rapid steps” to bring inflation to 2%. He is showing his resolve that he will do whatever it takes to stop inflation. This is similar to the former Fed Chairman Paul Volcker who broke high inflation with punishing rate increases in the early 1980s.
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In a further similarity to Volcker, Powell appeared to have subtly reference Paul Volcker by quoting his autobiography, “Keeping At It.” Towards the end of his opening statement, he states that the US Fed will “keep at it” in their fight against inflation.
This is also nothing new, as Powell gave a speech earlier this month with a subtle reference to Volcker that “we will keep at it” until the fight against inflation is over.
Putin factor
Russia President Vladimir Putin could possibly have made Powell’s fight against inflation a?tougher one.
Yesterday, he announced the?partial mobilization?of the Russian population, including calling military reservists into active service. This is an escalation of the Ukraine conflict and could possibly boost crude oil prices.
In the recent August CPI figures, one silver lining is the?falling oil prices?as gasoline prices fell 10.6% in August, the biggest monthly drop in more than two years. But inflation was still red hot as everything else increased.
See more details on sticky inflation:
Now, consumer prices could come down as a possible recession reduce demand for consumer goods and services. But, this could be?negated if oil prices shoot back up.
Crude oil prices are languishing at $84. This is about a 30% drop from the high of $121 this year. If crude oil prices rally back to $120 as a result of geopolitical tensions, inflation will continue to be a problem, regardless of how many rate hikes the US Fed makes. This will be the worst-case scenario for Powell.