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Fed More Worried About Recession Than Inflation

Published 03/23/2023, 03:49 AM
Updated 07/09/2023, 06:31 AM

The Fed understands that banking stress is ultimately disinflationary as the flow of credit to the real economy slows down and so does economic activity, and inflation with it.

Markets are now busy interpreting what it all means. Here is my assessment of Powell's words after the hike.

Wait: Have We Broken Something Here?

“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”

With inflation sticky and still trending above 5%, for the Fed to come out of the gate with a forward-looking statement like this is quite something.

Powell & Co deeply understand the disinflationary nature of banking stress.

This was also reflected in the economic forecasts, particularly in the uncertainty surrounding them.

Due to the banking stress, a large number of FOMC participants are worried about downside risks to GDP growth, while fewer participants expect an upside surprise on inflation.

In other words, the FOMC is more worried about a disinflationary recession than anything else.

Inflation Worries

“The Committee anticipates that some additional policy firming may be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

From 'Ongoing Rate Increases' to 'Some' and 'May'

Again, this shows that the Fed will be on the lookout for signs that they might have done enough damage through this banking stress.

This is something deeply new, as until now, the Fed was effectively on autopilot: keep monetary policy incrementally tight until you get people unemployed and inflation comes down.

Don’t make any assumptions. Just get the job done. Here, we are looking at a different Fed.

And the Summary of Economic Projections (SEP) clearly shows it.

Despite predictions for lower unemployment rate and higher core inflation in 2023, most likely to account for the banking stress uncertainty, the median Fed Dot for December 2023 wasn’t revised higher.

This is a proactively cautious Fed looking to assess the damage despite inflation still running hot.

Fed Economic Projections

But the second point was even more important, as it led to crucial market moves and opened the door to interesting market opportunities.

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This article was originally published on The Macro Compass. Come join this vibrant community of macro investors, asset allocators and hedge funds - check out which subscription tier suits you the most using this link.

Latest comments

have you been outside lately? everyone is ripping each other OFF! no prices on menus, flagrant overcharges on established accounts and not to mention poor quality
I agree. FED is concerned that banking stress as disinflationary and previous rate hikes have not all worked through the economy yet. I think we have a bumpy right ahead.
Excellent article.
The problem is most mortgagees are on low fixed interest rates, so the Fed can keep increasing rates because the only people affected are those seeking a new mortgage. The Fed, by increasing rates as they have done is damaging to banks and pension plans, but Joe Public are not yet being affected by increasing interest rates.
while anyone already in a mortgage isn't really affected, it affect rates on all other forms of debt eg cars, loans, credit cards and any other way of borrowing money so yes the public is affected but the affects are more pronounced for the middle/working class as they tend to have more short term debt as percentage of earnings while the top 20% have lower debt and tend to pay off credit cards in full.
There are millions of interpretations of what Powell said, wanted to say, didn't say or even will say next time. Tons of different views, but there is only one objective and unbiased price, which I follow
you can't really interpret what didn't happen... I'm not sure that part makes sense
Its what he didn’t say that should rattle you
Lol too funny
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