This May Be Fed’s ‘Final Phase Shift’

On Thursday, in "Powell Didn't Try To Kill The Rally. And That's Notable," I contextualized Jerome Powell's closely-watched remarks at the Brookings Institution by the recent easing in financial conditions. This is a critical discussion. When stocks rally, yields fall and the dollar retreats, it's counterproductive for a Fed that, until very recently, was desperate to preserve every bit of the tightening impulse engineered this year over 375bps of rate hikes. If inflation were 3.5%, or even 4%
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8 thoughts on “This May Be Fed’s ‘Final Phase Shift’

      1. Be realistic, folks. They’ve hiked in three-quarter point intervals for four consecutive meetings. Everything isn’t an excuse to malign the technocrats (although I do it a lot myself). Terminal rate expectations are now generally in the range where the staunchest Fed critics insisted rates would probably need to peak when the cacophony started last year, and at least a few Fed officials are pretty clearly on board with 5.5% or even 6%, which would be higher than some Fed critics have suggested. Meanwhile, core PCE was 5% in October.

        1. The overarching point I’m making is this: When you mess up (as the Fed pretty clearly did), the idea is to correct the mistake, not make another one in the opposite direction, just to prove something about how much you “get it” after the fact.

  1. The early 70s to early 80s inflation had dips too but it averaged a very high rate for almost a decade. It was very painful for a lot of people. I would feel better if they snuffed this thing out in it’s infancy.

  2. Maybe this recent bout of inflation was mostly pandemic-driven and “transitory” after all, with the defintion of that term subject to flexible interpretation. Given unfavorable demographic trends, high debt levels, and, one hopes, a mild COVID winter season, we could be back to the “new normal” sooner than a lot of people think.

  3. Perhaps the thought process is let the markets do whatever they want to do. People will figure it out when corporate profits decline and stay there for the foreseeable future. No point worrying about the battles when you know you’ll eventually win the war.

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