I sloppily/mistakenly said this morning that Neel Kashkari was non-voting when he does vote this year. Rate hike odds today through July, so would take into account a possible time out in June and maybe a hike in July and absorbing the Kashkari comments, has priced in a 32% chance of one more rate increase at either meeting. That compares with zero priced in of a hike as of two weeks ago (and actually priced in the small chance of a cut). Much more importantly here though is that the Fed is just about done hiking rates and thus Fed speak will be more influential on what comes after and the pricing of it. For 2023 the fed funds futures market is now pricing in fully just one cut and a modest 24% of another. That compares with the 100% chance priced in of two cuts by year end as of two weeks ago.
Fed speak thus far over the past few weeks then has been just as much about getting the markets away from the idea of rate cuts this year as leaving us in limbo on whether they will hike or not. I think I’m stating the obvious here but I think we need to extend the thought as to how much ammo does the Fed have when the time comes to be cutting interest rates if any recession deepens and inflation further slows. Greenspan in response to the tech bubble cut rates by 550 bps to 1%. Bernanke did by a similar amount taking the fed funds to zero from 5.25%. Powell of course had much less to cut in response to Covid but he sure did amp up QE. Putting aside the bad idea of zero rates and QE anyway, I just don’t see the Fed being able to repeat the aggressive easing we’ve seen in the past even if a recession becomes sharp. I believe inflation will still tie their hands, as will the value of the dollar and in turn energy prices and thus trying to save one thing will sacrifice others. Bottom line, the Fed’s safety blanket is not as strong as it once was and in fact now has holes in it.
Separately and soon after Bullard said let’s go two more times this year, though he doesn’t vote, Mary Daly who also does not vote said ‘we have to be extremely data dependent’ and is non-committal on that June meeting. Daly is also on theme that credit tightening is the equivalent of a “couple” of rate hikes.