Yesterday, the Federal Reserve Chairman spoke to the Senate Banking Committee.
Investors didn’t love what he had to say.
The following quote from Nick Timiraos at the Wall Street Journal pretty much sums it up:
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Mr. Powell said in the remarks prepared for delivery before the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
But what exactly does that mean? Does the Fed stop at 5.50% on the target overnight lending rate? 5.75%? 6.00% Higher? Inquiring minds want to know.
Rather than predict what is inside Chairman Powell’s head (a losing proposition), I will simply tell you what the markets are thinking.
Drum roll please: another 100 basis points of rate hikes between now and the end of July, possibly the end of June. Futures are predicting 75 basis points by the May 3rd Federal Open Market Committee (FOMC), and an additional 25 basis points at some point during the summer.
At the start of the year, a lot of folks thought the Fed might be done at 5.00% or 5.25%. Unfortunately, those days are over.
If the Fed does, in fact, take the upper range on the overnight rate to 5.75%, that would/could/should take Prime to 8.75%. We haven’t seen that level since the start of 2001. Let’s just say we are living in some interesting times, but will we go into recession? That is the $64,000 Question.
We have a lot of data coming up which will help us make that prediction. As a I type here today, things aren’t outrageously robust, but they are still okay…no debilitating recession in the old crystal ball. However, interest rate hikes tend to take their time moving through the economy, often up to a year. So, the short-term prediction is probably not. As for the longer-term prediction? It is too early to tell.
However, one thing is for certain: Jay Powell and the rest of this Federal Reserve are more hawkish on inflation than anyone would have thought this time last year.