Powell Says Fed Still Has a 'Ways to Go' After Half-Point Hike
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“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” he said. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said.
The Fed’s preferred yield curve spread the 18m3m swap over 3-month Treasury yields is as inverted as it was in 2019, 2006/07 and 1999. That virtually ensures a recession is on the way. This is now the time to take big risks, there will be very attractive buying opportunities in 2023 because it takes time for the lagged effect of interest hikes to appear and rates have gone up very quickly in 2022.
The point I found most interesting about the Jerome Powell’s news conference was the discussion of the labour market. He estimates a shortage of around 3.5 million jobs. A large part of that is because many people retired early during the pandemic and he stated 500,000 people died prematurely from COVID.
Since immigration reform is a non-starter in a divided Congress, the alternative is to shrink the economy back to its potential for the labour that is available. That implies a deep recession. Despite a more hawkish tone to the Fed statement 10-year yields continue to contract. That suggests the bond market is increasingly convinced deflation is likely to be more of an issue than inflation.
Financial conditions have received a boost from the bounce in stocks and bonds over the last two months. However, the Fed’s balance sheet/GDP is only beginning to roll over. That suggests significant room for further tightening.