The Fed: Rising Tolerance for Pain

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Discussion

For good reason, there is widespread exhaustion at the number of FED speakers every week plastering financial news headlines with policy guidance - but this exhaustion ends up leaving key pieces of FED policy guidance hiding in plain sight. This week we got more than several:

1. First and foremost, as discussed Tuesday, FRB Minneapolis President Neel Kashkari lowered the bar for rate hikes by stating very clearly that the Fed would need to hike again if inflation gets stuck at 3%.

2. Kashkari specifically noted the upturn in new lease rates is a concern, since housing services disinflation has been core to everyone’s forecast that inflation was/is on an inevitable glide path to 2%.

3. Kashkari aggressively pushed back against the post-NFP rally in financial markets, in multiple interviews on Tuesday and then again today (see below).

4. The King of the Doves, FRB Chicago President Austan Goolsbee, reiterated the importance of housing services disinflation, building on his curiously hawkish commentary back in April.

5. FRB Atlanta President Raphael Bostic put out a very specific level of job growth the Fed views as steady-state: the “low 100,000 range” - call it 125,000 for easy math. Paired with Kashkari signaling FED displeasure at the post-NFP melt-up in asset prices, Bostic’s guidance is very intentional signaling that the Fed viewed the 175k NFP print last Friday as a necessary, yet insufficient step toward the rebalancing necessary to bring inflation durably back to 2%.

The major takeaway from this week’s package of FED guidance is this:

If inflation is stuck at 3%, financial markets are materially underestimating the Fed’s labor and financial market pain tolerance.

It is quite obvious inflation is stuck at 3%, which means financial markets know it’s stuck at 3%. Financial market buoyancy means the market does not yet believe the Fed has a high pain tolerance. The Fed is likely slow-walking the market toward this conclusion for financial stability purposes, and once the next two inflation prints confirm the heat of Q1 inflation, the June 12 SEP will be the proverbial “hammer”.

May 15 should be interesting.

Kashkari. Again.

As referenced above, in a short interview today with CNBC alongside Goolsbee, Kashkari made the following statement about financial conditions (minute 2:57 in the video below), building on the message from Tuesday:

I was at the Milken conference earlier this week. And the number one comment I heard from major investors was: “Why does the Fed keep saying that financial conditions are tight? They’re not tight.”

We think that monetary policy works, in part, through financial conditions. And if the business community does not feel like financial conditions are tight, that makes me question: maybe we’re not as restrictive as we would have guessed.

Sell. All. Assets.