From the desk of Willie Delwiche.
Key Takeaway:
- Fed in spotlight as Powell & Co move rates to last cycle’s peak.
- A dovish pivot when financial stress has never been lower seems unlikely.
- Persistent bear market leaves bulls needing to prove their case.
While high relative to the previous decade, the Fed could in 2019 at least make the argument that inflation and wage growth were low from a historical perspective. Additionally there was evidence that financial stresses were starting to build. Now, the wage and price pressures that were still incubating in 2019 have erupted to their highest levels in decades while at the same time the financial stress has never been lower (according to the St. Louis Fed’s index).
The market has currently priced in another 100 basis points of tightening over the final three FOMC meetings this year (September, November, December). There is some expectation that Powell will use his post-FOMC press conference this week to tamp down those expectations. The Fed may want to preserve as much flexibility as possible to adapt to incoming information, which many hope will show decelerating inflation and which many fear will show outright contraction in growth. That remains to be seen. But with inflation pressure more related to labor market imbalances than supply chain disruptions, a sustained move lower in inflation is unlikely without considerable easing in labor market conditions.
The Fed may not want a recession, but in this environment it will likely tolerate one. A dovish pivot at this point is unlikely.
