Fed Watch: Hard Landing Trigger
Julian Brigden’s policy contacts tell him the Fed is worried about baking in a hard landing at a particular level of Fed Funds.
Discussion
Julian Brigden is making the rounds on various financial media platforms, and while 95% of the message across appearances is consistent, I came across one particular nugget in the interview with City Wire.
At minute 15:50 he says that his policy contacts tell him that the Fed is hesitant to hike again in September to a Fed Funds range of 550-575 (after hiking to 525-550 in July), because they are fearful 550-575 will bake in a hard landing.
It is for exactly this type of “policy contact” information why I follow Brigden so closely. Hugely important.
The hesitancy to get to 550-575 very much explains the juxtaposition of 12 out of 18 FOMC members penciling at least two more hikes (with 3 out of those 12 penciling in even more) - a very clear commitment by the “strong majority” of the Fed to engineer the hard landing they know is necessary to bring inflation structurally back to 2% - and the unanimous decision to pause in June.
Powell and the leadership team knows what needs to be done, but the FOMC as a whole is dragging it out. And by dragging it out, they’re allowing asset prices and economic activity to make their ultimate job even tougher, as Julian Brigden has been pounding the table on in these recent interviews. What I think this boils down to is this:
Danielle DiMartino Booth believes Powell is the top dot, penciling in a hike at each of the four remaining meetings in 2023, which would bring the Fed Funds target range up to 600-625. So why pause in June if that’s your view as Chair? Because Powell is using Committee unanimity as a policy tool.
Unanimity may not be available as a tool going forward if the labor market starts to really show signs of slowing. But if economic activity and inflation data firm up the way the bond market current suggests with 2s almost back to their 500 bps peak, Powell may end up being able to maintain unanimity by “methodically” hiking 25 bps a meeting for the rest of the year.
Regardless, a hard landing cometh. It’s just a matter of when, not if.