I think the bond market is misreading the @federalreserve. This is likely due to Powell’s communication style and some wishful thinking on the part of investors. Inflation is out of control and inflationary expectations have become unanchored.
The Fed has finally come to this realization and has decided to act, and is playing catch up. However, Powell does not come across as someone who wants to go to battle against inflation. He seems uncomfortable and reluctant, almost apologetic, about raising rates.
Each time he speaks unscripted in Q&A, the market interprets his statements dovishly. To fix his message, the Fed governors thereafter go out to clarify. To wit, Kashkari, a historic dove, on 6/17 unveiled his dot plot which shows FF at 3.9% by YE and 4.4% by YE’23. He says
75 bps in July and 50 bps thereafter ‘until inflation is well on its way to 2%.’ Then on 6/18 Waller said he supports 75 bps in July and said the Fed is ‘all in’ on fighting inflation. And then today Bowman, who speaks rarely but carries great import in light of the
rarity of her public statements, said ‘I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting as well as increases of at least 50 basis points in the next few subsequent meetings…’ And Bostick last week said the Fed would do
‘whatever it takes’ to bring inflation back to 2%. Despite the above coordinated commentary, the bond market has ignored these statements leading to a massive decline in short term rates since the Fed meeting. A prediction: the Fed is serious. Powell and the governors care about
the American people, our economy and their legacy. Powell does not want to be known as a worse chair than Arthur Burns. The Fed will raise rates 75 bps or more in July and 50 bps or more in subsequent meetings and won’t pause until it is clear and convincing that inflation is
headed back to 2%. FF of 5% or more next year is in the cards. Inflation is continuing its march unabated. Nearly every CEO in America is raising prices because they can and they must to offset rising expenses. The recession word is on everyone’s lips but recession talk won’t
bring down inflation. Consumers and corporations are well capitalized and underlevered. Banks are massively underinvested with one of the lowest ratio of deposits to loans in history. The potential for a future recession won’t stop the Fed from raising rates now. The Fed clearly
has a credibility problem as the bond market flat out ignores Powell’s and the governors’ commentary. This must be concerning to the Fed as managing inflationary expectations is critical to controlling inflation. Expect even more hawkish commentary until the bond market wakes up.