The Hawks Are Out

A pair of born-again Fed hawks suggested Monday it’s too soon for markets to assume we’ve seen the last hike of the cycle.

“I think we’re going to have to grind higher with the policy rate in order to put enough downward pressure on inflation,” Jim Bullard said, while speaking at an event in Fort Lauderdale. “I’m thinking two more moves this year.”

Fair enough, but “I’m thinking” that’ll be hard to pull off from an r-double-star perspective (just ask the ghost of SVB), even if Bullard may well be correct vis-à-vis the real economy and what’s needed to sever a inflation-wage nexus that’s plainly feeding on itself, whether you want to use the word “spiral” or not.

Bullard left the door open to a pause in June (not that it’s his call). “Exactly where those [hikes] would be this year I don’t know, but I’ve often advocated sooner rather than later,” he said. Bullard doesn’t vote this year but his voice is influential.

Meanwhile, Neel Kashkari, another erstwhile dove, told CNBC a prospective June pause wouldn’t necessarily mean no more hikes. “If we were to skip in June, that does not mean we’re done with our tightening cycle. It means to me we’re getting more information,” he said, calling it “important” that the Fed not explicitly signal the end, let alone declare any kind of victory.

Their hawkish musings came on the heels of Lorie Logan’s “we aren’t there yet” comment last week. Although Jerome Powell’s Friday remarks pretty clearly suggested June will be a “pause” meeting, it seems more and more likely it’ll be a hawkish pause, presenting Powell with a communications challenge for the press conference.

This is an important risk for markets which generally aren’t priced for a “pause then restart” scenario. I’ve been over that time and again. There’s considerable tension between the easing odds priced by markets (even when you conceptualize of those bets as a necessary hedge against myriad tail risks which aren’t likely to materialize in worst-case fashion) and the absence of fear in equities and credit (even if you can make the case that the tech rally in stocks is in part a reflection of a late-cycle, flight-to-quality trade).

“The equity market is now pricing in Fed cuts before year-end without any material implications for growth,” Morgan Stanley’s Mike Wilson wrote Monday. “Yet, Morgan Stanley economists believe the Fed will only cut rates if we definitively enter a recession, or if stresses in the banking system increase and/or credit markets deteriorate significantly,” he added. “What’s more, the Fed cuts currently in the price implicitly assume that inflation will fall to at least 3%, possible, but likely not without significant growth implications.”