In this article we wish to discuss whether the Federal reserve is done with rate hikes. We will look at the reason for the hikes so far (inflation), Jerome Powell has continued to say that monetary policy is being used to fight inflation through brining demand in line with supply. to abbreviate, kill demand through tightening financial conditions to bring it in line with supply thus killing inflation.
The Story So Far:
As a result of the events of march 2020 when the countries around the world where thrust into lockdown, supply chains where disrupted massively, and also to add to this the governments around the world having decided on lockdowns also had to pick up the bills for employees and businesses they had forced into lockdown, this saw in the united states a staggering $7 trillion plus ‘printed’ added to the money supply! With both disruptions to the supply chains and an increase in monetary supply by most governments in aid of lockdowns, prices went through the roof. The fed where very late to catch inflation as they continued to claim it was ‘transitory’…. They then pivoted on this stance later on as inflation in the united states went to a staggering 9.1% and hence the most aggressive tightening cycle ever in the united states!
The FED realising inflation was running away, kicked into action to return ‘price stability’ to the markets. they started upping interest rates in February 2022 to combat inflation. the markets all reacted to this and sold of before rate hikes started in anticipation of them. As markets do well when the liquidity tap is on QE and historically not so well when the monetary policy is restrictive generally.
The fed sins February 2022 today have upped interest rates by 5.25% / 5.50% in the name of fighting inflation as of today the 14th of September 2023! inflation yesterday in the CPI revealed came out at 3.6% having 2 months ago hit 3.0%. The federal reserves target for inflation is 2.0% so they are still a way off and surprisingly despite the interest rates and the swiftness of them, GDP and many other metrics to weigh up the economy are doing better then forecast given the fall in inflation, unemployment which is correlated with the stock market still remains low despite the monetary policy burden!
So Are The FED Done?
Maybe… The feds fight on inflation with monetary policy seems to be working as inflation went from 9.1% down to 3.0%! However inflation having bottomed at 3.0% in the US its now following yesterday print back at 3.7%, and the equation here is higher inflation could result in higher rates, which in term would effect liquidity and thus the market likely negatively!
Core CPI however went down, and some would argue the FED give more weight to Core CPI than CPI:
Regardless of the higher print in the CPI the probabilities according to the CME’s FedWatch Tool is that in the next meeting on the 20th of September 2023 the FED will no up interest rates again to the probability of 97% in favour of no hike and 3% in favour of a hike. This is very likely to be the outcome of the next meeting, however this does not mean they are done for certain there are multiple variables that will have to be watched to determine this like inflation and the US02Y which leads the Fedfunds rate.
The US02Y is a leading indicator for FEDfunds rates (interest rates) as the bond market is directly effected by monetary policy and the yield is directly correlated to the bond as its a self regulating mechanism! This is going to be a key chart to watch as a spike in the US02Y may indicate higher rates are coming, right now they are about where they should be to suggest no more hikes are on the horizon with the US02Y at 4.98% and the FED funds at 5.25%. (the US02Y tops out first)
Truflation, is a brilliant tool that looks at a significantly larger basket of goods than CPI and can be a brilliant leading indicator for the CPI stats, its something we keep an eye on closely in trying to figure out where inflation is at and heading! You could perhaps consider this a lead indicator.
There is not certainty that the fed is done with hiking rates, however other central banks have stopped like Canada, Australia and potentially today the European central bank, at least for the moment, so its likely that the FED will not hike in the next meeting and there is a chance that they will do no more hikes until there is reasons to do so like a continued surge in inflation. there is a laggard effect with interest rates with an average of 25 months and in more developed nations it can be up to 50 months according to a study done, so they may wait to see how the monetary policy plays out from here. The US equity market is doing well this year despite continued hikes, are they sniffing out an end to the hikes and a pause into potential QE coming at some point…. JPMorgan said today ‘they think the FED is done with rate hikes and will pause next week’! Here at allincrypto.com we will keep you up to date on not just everything crypto but the external factors that effect our market!