Fed hold steady but WSJ urges Fed to continue raising yields later

Investment Analysis Clubs Macro Economic Trends and Risks
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The bond futures market was betting on the Fed holding the fed funds steady today. The Fed didn’t disappoint…for the time being.

Fed Holds Rates Steady But Expects More Increases

Officials had approved interest-rate hikes at their previous 10 meetings to combat inflation

By Nick Timiraos, The Wall Street Journal, June 14, 2023

Federal Reserve officials agreed to hold interest rates steady after 10 consecutive increases but signaled they are leaning toward raising them next month if the economy and inflation don’t cool more.

Most of them penciled in two more rate increases this year and lifted their expectations for growth and inflation in projections released Wednesday after their two-day policy meeting.

In a statement, the Fed said the decision to maintain the benchmark federal-funds rate in a range between 5% and 5.25%, a 16-year high, might be short-lived…[end quote]

The WSJ is encouraging the Fed to continue raising yields.

Stock Market to Fed: You Haven’t Done Enough

Bullish stocks, low bond yields and recovering housing market suggest interest rates aren’t that restrictive

Greg Ip hedcutBy Greg Ip, The Wall Street Journal, June 14, 2023

…
The Fed’s mission has been to get interest rates high enough to slash inflation from its current 4% to 5% range to 2%, even if that means pushing the economy into recession and unemployment higher. If the Fed had succeeded, you probably wouldn’t be seeing these things: stocks entering a new bull market, a rebounding housing market or long-term Treasury yields well below the inflation rate…

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The Fed considers a real rate of 0.5% neutral, meaning it neither stimulates nor slows economic activity. Anything above that is seen as restrictive enough to nudge unemployment higher and inflation lower. That said, [the current] real rate of 1.4% [calculated based on TIPS yields] isn’t that restrictive. The real rate was higher before every previous recession at least since 1960… [end quote]

Core CPI, reported last week, rose 0.4% for the month of May. Core PCE index prices, which exclude volatile food and energy prices, have been more stubborn. On a year-over-year basis, they rose 4.7% in April, 4.6% in March, and 4.7% in February and January. The Fed targets 2% inflation over time.

The Fed has already said that they will raise the fed funds rate and hold them for an extended period until they are sure that inflation has stabilized at their target. (Please spare me nit-picking – this is what the markets understand.)

It’s already June and the core inflation rate hasn’t changed. I think the Fed will continue to raise later and won’t cut in 2023.

Wendy

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I’m pretty sure that’s not accurate.

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It may not have come down as much as officials would like or as fast as you would like, but it’s definitely coming down. Funny thing about inflation, it has momentum. That means if you try to push it down too fast you will almost certainly foment a recession. A nice slow change downhill is the prescription for a soft landing.

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The inflation measure the Fed uses most, core PCE index, has not dropped for 4 months.

Wendy

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Except the small matter that it is factually incorrect to say that the Fed or Powell has made the specific statement bolded above. They have not made a statement that has these two important elements:

  1. Fed will not take a specific action (cut rates)
    until a specific event occurs:
  2. measured PCE inflation reaches 2%

I cannot prove a negative that the above statement did not occur, but someone could prove the positive by simply providing a quote from the Fed or Powell that contains the above two elements (and I really am open-minded here if someone provides actual evidence in the form of an actual quote).

But no one has provided such a quote despite claims that the Fed has said this often, and claims that Google can easily find such a quote.

Here is a claim (and I admit it is a claim):
as of today, market participants would be very surprised for the Fed to hold rates at their highest level and not cut until year-over-year PCE inflation reaches 2%. This seems like a policy that is virtually guaranteed to not result in a soft landing because, as the Fed has actually said, inflation reacts to policy with long and variable lags.

If the Fed actually believes their own language about lags, then it would make almost zero sense for them to say, in advance and given the recent path of economic conditions, that they will keep rates at the highest level (or “raise and then hold” as stated above) until trailing 12-month inflation declines all the way to 2%.

Looking for Powell’s missing quote…

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