The Fed's Intentions

As we all know, there is a debate going on in the market about whether or not inflation has finally started to recede and therefore the Federal Reserve can start to let up on the brake pedal and — this seems a stretch — even start lowering interest rates and easing monetary policy in the near future.

Right now, those who believe the Fed is done tightening are winning the debate, witness the sharp rise in equity prices over the past two months. But at the same time several Fed officials have been warning that they are not done tightening yet — not by a long shot — and that more rate hikes are in the offing.

Notably, Minneapolis Fed President Neel Kashkari said last week that “there’s a disconnect between me and the markets,” adding that it was “not realistic” that the Fed would be lowering rates in the next six to nine months.

St. Louis Fed President James Bullard was equally blunt, telling the Wall Street Journal that he would “lean toward” another 75-basis point rate hike at the Fed’s next scheduled meeting beginning September 20. He said he expects high inflation “to prove more persistent than what many parts of Wall Street think.”

Yet many investors don’t believe them.

Does this mean that the Fed needs to make a much stronger message about its intentions, or is it content to let the market do what it wants to do and suffer the consequences if it has misjudged? Or are these investors correct in their assumptions?

Throughout his tenure, Fed Chair Jerome Powell has been not only market friendly but also keen on making sure the market understands what the Fed is up to. He doesn’t want any surprises. So does this mean that he is ok with what the market is doing, or if it’s wrong in reading the Fed, does he need to make a much clearer message?

Later this week the Federal Reserve Bank of Kansas City will host its annual Jackson Hole Economic Symposium in Wyoming. That seems like a good time for Powell to make it more crystal clear what the Fed’s intention are.

The Fed’s last monetary policy meeting ended on July 27 — nearly a month ago — at which time it raised its target interest rate by 75 basis points for the second consecutive meeting. It doesn’t meet again until September 20 —almost a month away — so Jackson Hole seems like an appropriate time for the Fed to make a more unmistakable message about its intentions, if in fact it feels the need to.

Of course, if the Fed felt the market was going way off kilter in its judgement of Fed intentions, it could always raise rates between scheduled monetary policy meetings, although Powell has indicated he doesn’t prefer to do that.

But that doesn’t mean he can’t if he wanted to.

After all, during past crises, the Fed had no problem lowering interest rates outside of meetings; if inflation is as big and as persistent a problem as we are told, then raising rates between meetings — maybe by 25 basis points instead of 75, in order to send a message — wouldn’t be out of line.

Of course, the Fed has only itself to blame if it’s not sending the markets a clear enough signal. For example, the minutes of the Fed’s July 26-27 meeting, released last week, said that “Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation” (emphasis mine).

Yet at the same time some Fed officials said they saw “a “significant risk … that elevated inflation could become entrenched if the public began to question” their seriousness in bringing it under control. About the only thing the Fed seems to be clear about it is there a difference of opinion within the Fed itself.

So is the market correct in thinking that monetary easing is just around the corner?

Based on the inflation data we’ve received so far and the comments by Fed officials, that seems unlikely. But then again, what’s your definition of “at some point?” Even Bullard said he didn’t “really see why you want to drag out interest rate increases into next year.” Is that close enough to justify the current bullishness in the stock market?

The Jackson Hole meeting is always closely watched by the market. Given the huge distance between Fed meetings, this year’s gathering will be particularly so.

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.