The Week in Review June 20, 2022
75
The Federal Reserve hiked the fed funds rate by 75 basis points (bp, 1 bp = 0.01%) to a range of 1.50–1.75%. It’s the first time since 1994 that the Fed boosted the key rate by 75 bp.
So, why did the Fed raise by 75 bp? After the early May meeting, Powell largely dismissed such a move.
At his press conference, Powell said that inflation “again surprised to the upside;” therefore, a “larger increase… was warranted.” But doesn’t the surprise move deal another blow to the Fed’s credibility?
Last year, the Fed repeatedly downplayed the idea that the surge in inflation was anything more than “transitory,” its preferred word at the time.
Today, the Fed is playing catchup, trying to regain control of the narrative. On Wednesday, Powell said the Fed is looking for “compelling evidence that inflation is moving down.”
“From the perspective of today, either a 50 or 75 bp increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting,” he said. In other words, he’s giving himself more wiggle room.
A historical perspective
We’ve compared this cycle to the last aggressive rate-hike cycle, which occurred in 1994. But as things are shaping up, we may have to go back to the 1980s. During 1994, the Fed raised by 300 bp in one year, including three 50 bp and one 75 bp. But the Fed paused in between the outsized hikes. Right now, a pause doesn’t seem likely.
The graphic below provides a historical review of the fed funds rate between 1980 and 1996.
Given the potential speed and magnitude, the pace of rate increases from May through September may turn out to be the largest and fastest since 1980 when then Fed Chairman Paul Volcker raised the fed funds rate by 1,000 bp. It stifled double-digit inflation but at the cost of a steep recession.This isn’t 1980, though investors are fretting over sharply higher interest rates, inflation, and warranted or not, fears of a recession.
A near-term break in inflation will probably require some luck with the supply chain and commodity prices. And the Fed appears willing to risk a recession in order to control inflation. But a soft economic landing would likely do the most to support investor sentiment.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
The amount of money mortgage holders could pull out of their homes while keeping a 20% equity cushion rose by an unprecedented $1.2 trillion in the first quarter of 2022. Total tappable equity stood at $11 trillion, or two times the previous peak in 2006. That works out to an average of about $207,000 per homeowner. - CNBC, June 6, 2022
Japan has such a punctual culture that if a train is delayed five minutes or longer, you are handed a delay certificate at the arriving station to verify for your teacher or boss why you were late. -Morning Brew, May 28, 2022
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