Fed Watch: Monetary vs. Fiscal
Nick Timiraos article this weekend could be the Fed laying the groundwork for even more hikes.
Discussion
Timiraos typically publishes Fed outlook pieces ahead of the FOMC and does the normal reporting on key messaging from the Fed in the inter-meeting period. But there are times where he’ll drop an irregularly timed article that is very much worth keeping in the back of your mind.
Last July 5 and 10, for instance, he wrote about the Fed’s desire to avoid the “stop and go” policy error of the Burns Fed in the 1970s. Those articles were out of the blue weekend pieces communicating a key message that wouldn’t become official Fedspeak until Jackson Hole a month and a half later.
This weekend Timiraos wrote about the resilience of the economy to tighter monetary policy as a result of strong fiscal support and healthy consumer balance sheets. The Fed has already communicated its strong intent to hike two more times by year-end, so unless this is simply a random piece by Timiraos it is likely laying the groundwork for some form of even more tightening - whether that’s more hikes or more QT, or some combination of the two, I don’t know.
What’s interesting is that this weekend’s piece comes on the heels of the June 13 article that floated the possibility of a 7% terminal rate and touched on the same message of defending the 2% inflation target.
I will be closely watching Fed Funds futures pricing for clues that the Fed is preparing to raise rates this year by even more than the currently projected 50 bps per the last SEP (though with the 3y/10y UST curve at 116%, odds are already high even more hawkishness cometh).
June 25:
https://www.wsj.com/articles/why-economies-havent-slowed-more-since-central-banks-hit-the-brakes-d5103ec7
June 13:
https://www.wsj.com/articles/fed-rate-projections-could-rise-to-underscore-inflation-anxieties-496a0a60
Exhibits
Pandemic-related oddities and fiscal stimulus blunting the impact of central bank tightening.
Always, always focus on the closing paragraphs. If the Fed is communicating something, it is typically emphasized at the end.
To this point, here is the closing message from the June 13 piece: stay on watch for a 7% terminal rate.