The Independent Market Observer

Fed Meeting Recap

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Sep 22, 2022 1:05:24 PM

and tagged Commentary

Leave a comment

the fedThe other day, I wrote a post about how, with expectations very hawkish for the Fed, the thing to watch for in the latest Fed meeting was whether Chair Jay Powell managed to sneak in some hidden dovishness. He could have said, for example, that the Fed remains data dependent, suggesting that it would ease if the data improved. He could have said, for instance, that there were signs that inflation is moderating. He could have said a lot of things.

What he actually did say, however, was that the Fed is determined to keep hiking rates and to keeping rates high, until inflation is back down to 2 percent—which it does not expect until 2024 at the soonest, and probably 2025. He did say, unmistakably, that the Fed had to get inflation down despite the economic costs. He did say (not explicitly, but implicitly) that the Fed would stay the course even if we get a recession. And he did say the likeliest path to getting inflation down was to drive unemployment up significantly.

So much for dovishness.

The Real Takeaways

There are two real takeaways from this, and the second is the more worrying. The first is simply that the Fed is committed to getting inflation down to target levels, and this is neither a surprise nor especially newsworthy. This has been the message at least since Powell’s Jackson Hole speech. Indeed, he started yesterday’s press conference by stating that this message was the same as that from Jackson Hole.

No, the real surprise from yesterday is simply that the Fed now expects getting inflation down to be a multiyear project and that it expects a recession along the way, possibly a bad one. Powell explicitly said that the Fed doesn’t know how bad it will be—the expected growth and unemployment numbers are already bad—but it will persist regardless. The surprise is now that the Fed expects inflation to be higher for longer and, therefore, for interest rates to be higher for longer. That markets are wrong to expect cuts sometime next year. And, looking at the data, pretty much the whole board seems to be in agreement.

So much for dovishness.

The Market Reaction

Unsurprisingly, after having a night to digest this, markets are reacting. The yield on the U.S. Treasury 10-year note is up sharply, taking us back to pre-financial crisis levels for the first time since late 2009. Higher rates mean lower stock valuations, and markets are down across the board. Powell was right, in that his message was the same as at Jackson Hole, but even starker, and markets are reacting the same way.

This changes expectations going forward. The markets had been pricing in rate cuts next year, but if Powell is correct, that is unlikely. The markets have been pricing in a peak rate of around 4.5 percent, but that might not be enough. The future now looks much riskier from a monetary policy perspective than it did 48 hours ago.

No More Safety Net for Economy

It also looks riskier from an economic perspective. The major bright spot so far has been strong job growth, and the Fed now has that in its sights. Understandable—that is what is driving the excess demand that is keeping inflation high—but a bad sign for growth overall. And by saying that a recession will not necessarily loosen policy, the Fed has removed a safety net under the economy.

Back to the Future

So, the real message yesterday was not hawkishness—we knew that. The real message was that the Fed is now looking solely at inflation as its mandate. Jobs, economic growth, and markets may all have to be, and will be, sacrificed to getting inflation under control. The Greenspan/Bernanke/Yellen put is dead, and we are back to the future with Paul Volcker policies.

This will take some getting used to, and Powell and the board may not be able to keep it up. But for the moment, things really look to be different this time.


Subscribe via Email

Crash-Test Investing
New call-to-action

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®