Fed insiders have been talking again this week, notably including St. Louis’s Bullard and Boston’s Collins. Bullard gave a presentation hinting at a “terminal rate” for Fed funds between 5%-7%. Collins’s remarks were notable for explicitly keeping a 75 bp December 14 hike on the table.
The general direction is no surprise; we knew the Fed doesn’t want stock prices taking off again and they’ve been trying to do that since the last CPI release. And although the FOMC was ostensibly backing away from “forward guidance” not that long ago, at the last post meeting press conference Powell was all about tamping down anticipation of a dovish turn.
So what will they announce on December 14? It’s pretty clear, absent some major unexpected development, it will be either 50 or 75 bp. A 50 bp hike would likely be followed with at least another 25 at the next meeting.
Which one largely depends on the data between now and then. We have another monthly employment report and CPI release intervening, but also a PCE deflator … the FOMC’s preferred index of consumption price inflation. Not so widely appreciated, but not to be underestimated, is asset prices, especially stocks, in light of the Fed’s focus on “financial conditions” as an intermediate target in its inflation reduction quest.
Of the two, I’d rather see 75 bp in December, followed by a bigger step down to 25 at the next meeting. Assuming any further increases are needed at all. The drip-drip-drip water torture of future expectations is doing more harm than good. The Treasury yield curve is profoundly inverted, suggesting longer dated maturities have already begun to bake in rate cuts as soon as the second half of next year. The FOMC will look increasingly silly talking about future hikes and higher terminal rates as time passes.