FED THREAD: Would the Fed surprise markets by doing a 75-basis point increase next week?
Much of their tightening this year has been about shaping expectations. Do big surprises help or hinder the public's understanding of their reaction function?
1/ wsj.com
Much of their tightening this year has been about shaping expectations. Do big surprises help or hinder the public's understanding of their reaction function?
1/ wsj.com
Consider what Powell said in his opening press conference statement last month
β’ "Inflation has obviously surprised to the upside...and further surprises could be in store."
β’ "We therefore will need to be nimble..."
β’ "And we will strive to avoid adding uncertainty..." 2/
β’ "Inflation has obviously surprised to the upside...and further surprises could be in store."
β’ "We therefore will need to be nimble..."
β’ "And we will strive to avoid adding uncertainty..." 2/
Consider my question to Powell on May 17: Why not rip the Band-Aid off and do 100 basis points in June?
Powell: "Monetary policy works through expectations.... We like to work through expectations."
3/ wsj.com
Powell: "Monetary policy works through expectations.... We like to work through expectations."
3/ wsj.com
So far this year, the Powell Fed has taken the view that what happens at any individual meeting (the precise tactics) isn't as important communicating about the path over 6-12 months.
Such a consideration would argue for extending the path of 50s for longer.
4/
Such a consideration would argue for extending the path of 50s for longer.
4/
But of course, the Fed is data dependent, and today's data was not good.
From the same May 17 interview:
βWhat we need to see is clear and convincing evidence that ... inflation is coming down. And if we donβt see that, then weβll have to consider moving more aggressively,"
5/
From the same May 17 interview:
βWhat we need to see is clear and convincing evidence that ... inflation is coming down. And if we donβt see that, then weβll have to consider moving more aggressively,"
5/
The path could evolve in two ways in the coming weeks
Officials could stick with their current plan of raising interest rates in 50-bps increments indefinitely until they see signs that inflation is conclusively downshifting
You can tighten a lot with 50 bps every 6 weeks
6/
Officials could stick with their current plan of raising interest rates in 50-bps increments indefinitely until they see signs that inflation is conclusively downshifting
You can tighten a lot with 50 bps every 6 weeks
6/
Such a path of rate rises would lift the Fedβs overnight benchmark rate to a range between 2.25% and 2.5% by September, and to a range between 3.25% and 3.5% by December.
This would represent the most aggressive interval of policy tightening since the 1980s.
7/
This would represent the most aggressive interval of policy tightening since the 1980s.
7/
Alternatively, Powell and his colleagues could open the door next week to even larger 75-basis-point rate rises as soon as July, depending on how the data evolve.
Powell is set to testify before Congress on June 22-23.
8/
Powell is set to testify before Congress on June 22-23.
8/
Add all of this up. Doing a 75-basis-point hike next week would be a surprise along two dimensions, because it would repudiate a lot of their strategy so far this year. But beyond that? We'll find out soon enough. 9/9
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