Fed Watch: Timiraos FOMC Preview Part 2

Discussion

Nick Timiraos is out tonight with part 2 of his FOMC preview, confirming what the Fed already told us through Roger Ferguson on Monday (see below):

September is live.¹

Timiraos also included two key incremental pieces of information that strongly suggest Powell will be hawkish to very hawkish tomorrow: 1) he revealed that better-than-SEP inflation readings are not enough to stop rate hikes, and 2) a long-run neutral rate is likely higher than the current 50 bps real rate assumed by most FED officials. The first piece is not entirely new, as Waller outlined similar criteria for hiking in September in a pre-blackout speech; but the fact Timiraos used the minority viewpoint of the dovish Goolsbee as evidence supporting the side of pausing due to decelerating inflation is a key “tell” that Powell’s bias is toward hiking in September unless the economy really starts to cool over the next couple of months.

The second piece of information is new and quite random, IMO. I have seen little to no discussion about the long run neutral rate since the June FOMC, so the fact it was not only included in the Timiraos preview but was the closing section is notable (always key to note what information Timiraos closes with). This tells me the Fed wants the long end of the curve higher. The obvious way to get the long end up is via more QT, but Waller made it clear before blackout that QT is on autopilot. So, perhaps Powell just continues to push the “higher for longer” rhetoric and provides a bit more detail around how long until the Fed starts thinking about cuts (the fact former FED official Richard Clarida recently floated the possibility of cutting in March 2024 does contrast a bit with a “higher for longer” message…though cutting to a higher neutral real rate would be a way to finesse the two competing messages).

Exhibits

Timiraos FOMC preview part 2.

https://www.wsj.com/articles/federal-reserve-interest-rate-decision-c5eec106

Ferguson interview notes.

This may seem confusing, but the fact Timiraos mentions investors will look for signs September is live means September is live. It’s coded Fedspeak.

Below-SEP inflation is not enough to stop hikes; and the fact Goolsbee’s support of an inflation-dominant hike test is used to support that side of the debate just confirms where Powell’s head is actually at: a September hike is coming unless the economy more obviously cools over the next couple of months.

Higher neutral rate is on the table for discussion. Very notable inclusion in this preview piece given the lack of communication about it in the inter-meeting period.

1. Ferguson actually said September and November are live, which, to the extent the Timiraos piece is market consensus heading into tomorrow, creates room for a hawkish surprise if Powell puts September and November on the table.