75bps Fed hike increments would’ve sounded positively ludicrous a mere six months ago. Now, they’re par for the course.
On the heels of Nick Timiraos’s Monday afternoon shot across the bow, CNBC and Bloomberg likewise tipped the possibility of a jumbo hike from the Fed on Wednesday, all but confirming the move. The message is well and truly socialized.
Timiraos’s initial tip triggered a mind-bending surge in front-end US rates (figure below).
Both Barclays and Jefferies jumped to call for a 75bps June hike last week, following May’s disconcerting CPI report. Now, everyone is falling in line. JPMorgan changed their call on Monday afternoon, as did Goldman.
There’s little utility in documenting every individual concession to the reality of the Fed’s Volcker moment, but it’s worth quoting Goldman’s call for posterity and for the extent to which it recognized Timiraos as the go-to conduit for the gods.
“The article is a departure from another article that Timiraos published [Sunday] that characterized such a move as ‘unlikely,'” Goldman’s Jan Hatzius wrote. “Our best guess is therefore that the article is a hint from the Fed leadership that a 75bps rate hike is coming at the June FOMC meeting on Wednesday.”
So, the Committee read what Timiraos had to say, determined their earthen vessel was out of step, and asked him to convey the new message to a world on tenterhooks.
Goldman now sees 75bps hikes this week and next month, as the Fed “quickly reset[s]” rates to neutral, followed by 50bps in September and 25bps in November and December. Notably, their terminal rate forecast was unchanged at 3.25-3.5%, which is below market pricing.
At this point, the bank suggested, the Fed is risking a hard landing. Or, at the least, a landing that isn’t soft.
“Over the last month we have argued that market pricing was in roughly the right place in the sense that the drag from tighter financial conditions, in conjunction with the sizable fiscal drag this year, puts the economy on the somewhat below-potential growth trajectory that we think is needed to rebalance supply and demand,” Goldman said, on the way to noting that “the additional tightening of financial conditions on Friday and Monday, driven by a rise in terminal rate expectations to about 4%, would imply a meaningful further drag on growth that goes somewhat beyond what we think policymakers intend or should be targeting to have the best chance of bringing down inflation without a recession.”
It’s probably fair to say the Fed is coming to terms with the notion that quelling inflation will entail engineering a downturn. Of course, it’s possible the US is already in a recession, so one key question headed into the back half of 2022 is how deep any preexisting downturn might ultimately get with the Fed locked into a brutally procyclical policy setting.