The Fed will raise rates this week in what may or may not be remembered as the last hike of the most aggressive tightening cycle in a generation.

This discussion is hopelessly repetitive at this point. If I had a nickel for every time I’ve written the phrase “most aggressive tightening cycle in a generation” over the past year, I’d have… well, some nickels. I’d have a lot of nickels.

I won’t stray into a philosophical tangent, but I felt compelled to acknowledge the monotony. It’s no longer possible to say anything novel or interesting about the Fed’s belabored efforts to prove something about monetary policy’s capacity to constrain the pace of consumer price growth. This is a rote editorial exercise, and I imagine it’s every bit as mind-numbing to read as it is to write. Alas.

This week’s hike is fully priced. There’s no chance it won’t happen. Notwithstanding favorable CPI and PPI reports for June, the data supports additional tightening. Just as importantly, the market “supports” it too. With few exceptions, the Fed has demonstrated a propensity this cycle to take the hikes the market is willing to price. That’s intuitive given the circumstances: When you’re behind the curve and trying to catch up, you’re more than happy to deliver on any and all tightening markets are prepared to countenance. Looking out into next year and beyond, markets are priced for considerable easing, though.

The updated figure above gives you a sense of what’s priced through 2025, and how pricing has evolved since earlier this month. Some strategists believe the market’s easing expectations for next year are too aggressive, particularly in the context of an economy which continues to outperform and might’ve re-accelerated in recent weeks.

Jerome Powell will be keen to preserve the Fed’s optionality or, in layman’s terms, he’ll be noncommittal when queried on whether the July move is, in fact, the Fed’s last of the cycle. Expect a lot of “What we’ve said”s during the press conference. Powell likes those. When he gets questions he can’t (or won’t) answer, he references the policy statement and previous communications: “What we’ve said is that…”

Policymakers will insist on data dependence from here, but that’s a vexatious concept because the data is convoluted. I’ll walk through a few key issues.

Headline inflation is cooling, but a lot of that (and maybe all of that) is unrelated to Fed actions and prone to reversing, albeit certainly not in a way that would push the YoY prints anywhere near last year’s peaks. Various measures of core inflation are moderating, and will probably continue to do so into the back half of the year, but a strong services sector could put a floor under that. And the floor likely has a three-handle.

The shelter disinflation that’ll begin to show up in the months ahead is an artifact — it already happened. That’s potentially problematic. In the here and now, home prices are rising again, both on a monthly basis and very nearly on a YoY basis too. It’s possible that everyone who could be priced out of the housing market already is. 7% mortgage rates don’t seem to be curbing demand anymore. Instead, buyers just wait a week or two for the next bond rally and then lock, when mortgage rates tick a few basis points lower. But 7% rates are curbing resale activity which, in turn, supports prices. Although the read-through of the resale inventory shortage for new construction is good news for the economy, it may be “good” news of the bad variety. If the seven-quarter drag from residential investment on GDP becomes a tailwind, that could offset slower consumption and lackluster business investment, thereby preventing a deceleration to the below-trend pace of growth the Fed is explicitly trying to engineer.

The labor market is still strong. Monthly job gains are robust (very much so if you go by ADP’s figures), claims are subdued, wage growth is moderating but not fast enough, job vacancies are well off the highs but remain historically elevated and too many people are too comfortable quitting. When juxtaposed with a still rock-bottom unemployment rate, the drop in job openings from the highs points to “immaculate disinflation,” but many economists still doubt that’s sustainable. Matching efficiency is an issue. Eventually, the unemployment rate will have to climb at least a little bit to bring wage growth back down to levels consistent with price stability as arbitrarily defined by the Fed. There’s probably a limit to how much of that work can be “outsourced” to the JOLTS headline.

Behind it all is the “sufficiently restrictive” debate. It’s possible to argue that the Fed’s rate hikes had very little to do with the moderation observed in measures of headline inflation so far. The “lags” are variable and uncertain. Maybe rate hikes are transmitted more quickly than they once were thanks to a faster-acting financial conditions channel. Maybe not. Whatever the case, underlying measures of trend price growth only recently began to show signs of convincing moderation, where “only recently” means in the past two or three months. And, as noted, the labor market is nowhere near rolling over, or at least not as far as anyone can tell. It’s possible the Fed would need to raise rates several more times if they wanted to have a real claim on a policy rate that’s unequivocally restrictive.

The figure above is the difference between the monthly average funds rate deflated by year-ahead University of Michigan expectations with the NY Fed’s estimate of r-star for Q4 2019 through Q1 of 2023. If r-star is materially higher (as some, including myself, believe), policy isn’t restrictive at all.

Anyway, there’s obviously no SEP at the July meeting, which means traders (carbon-based and otherwise) will parse the new statement for any tweaks to the forward guidance and then Powell’s press conference, for clues about the September meeting. I doubt much will be gleaned.

With (sincere) apologies, there’s little utility in citing a bunch of analyst commentary. It’s this simple: Either various measures of core inflation (i.e., “super,” “trimmed,” “median,” “services ex-housing,” etc.) continue to soften and the labor market continues to exhibit incremental progress towards normalization (e.g., cooler wage growth, fewer job openings, a more moderate pace of monthly job creation, etc.), or not. If so, then maybe July is the last hike. If not, then maybe there’s another hike in September, with the new SEP, or maybe it gets pushed to November to give the data more time to “speak.”