It’s my belief the Fed will hike one final time at their late July meeting and then go on an extended “pause”. Higher rates, tighter financial conditions, and ongoing quantitative tightening (code name for the Fed balance sheet shrinkage program) is slowing both the economy and the level of inflation. The UST yield curve has been inverted for 11 months now. That inversion acts as the brake for the economy and it works with a lag effect. The fastest rate hiking cycle in history is nearing its end.
Below is a snapshot of all the inflation measures Fed chair Powell likes to quote in his press conferences, Congressional hearings, and the odd backyard cookout to anyone who will listen. These inflation readings are all down a lot with the noticeable laggard being shelter costs. Those costs are about to fall too as real-time rental data is cratering and enormous multi-family apartment supply looms. I think it’s a final hike in July and then Powell & Co. will use their annual August Jackson Hole summit to declare the war against inflation is nearing an end.
After July, the Fed doesn’t vote again until September – any hike then or thereafter risks the possibility of what they are marching towards right now: a soft landing for the economy.
P.S. The bond market is starting to see this scenario play out as well. The 2y UST spiked to 5.1% just eight days ago on a strong ADP payroll. The past week has seen a soft jobs report last Friday and several soft inflation readings this week. The 2Y UST now stands at 4.7%. It wants to go lower.
Source: Referenced above as well as JonesTrading LLC as of July 13, 2023
Richard Barrett
Chief Investment Officer
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