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Fed Policymakers Having Second Thoughts About Pace Of Rate Hikes

Published 10/25/2022, 04:42 AM
Updated 07/09/2023, 06:31 AM
  • Fed hopes to maintain credibility on inflation while slowing hikes
  • Political considerations start to weigh on monetary tightening
  • UK opts for stability as Sunak seeks to restore orthodox economic policies

Some of those managing the smart money are getting fed up with the Fed. Barry Sternlicht, a billionaire who heads Starwood Capital Group, referred over the weekend to Jerome Powell and “his band of lunatics,” while David Rosenberg, head of the eponymous research group, said on Monday that Powell has gone from Bambi to Godzilla.

But of course money managers would complain when the Fed is ratcheting up interest rates without worrying if they plunge the economy into recession. What they blame the Fed policymakers for is waiting too long to fight inflation and then taking a sledgehammer to it.

There’s little question in anyone’s mind that Powell and his groupthink Federal Open Market Committee made a mistake about inflation last year, and we’re all paying the price now. The question at this point is whether a sledgehammer is the right tool to fix it.

Some FOMC members seem to be having second thoughts. San Francisco Fed president Mary Daly said on Friday that it’s time to start talking about slowing the pace of interest rate hikes.

Although the FOMC is expected to go ahead with a 75 basis-point (bp) hike in November, investors are beginning to hope that a December hike might go down to 50 bp.

Daly’s remarks echoed those of Fed Governor Christopher Waller, who earlier this month said the monetary policy panel would be having “a very thoughtful discussion about the pace of tightening at our next meeting,” which is set for Nov. 1-2.

But the remarks from the money managers, like earlier comments from economists Mohamed El-Erian and Nouriel Roubini, suggest that the Fed policymakers have lost a lot of credibility. The problem is, they are still the ones making decisions—not all the people who know better.

Minneapolis Fed chief Neel Kashkari has worried aloud that the increased unemployment from a recession hits black workers disproportionately, bringing unemployment in that segment of the population up to double the headline level.

Sternlicht is worried about the impact on low-income workers in general.

"So the rich guy who loses 30%, he's still rich, right? But the poor guy who's working in an hourly job that loses that job, he's going to say: ‘Capitalism is broken, it didn't work for me. I lost my job. And this whole system has to go out the door.’ You're going to have social unrest.” 

Whatever happens with control of the two houses of Congress in the U.S. midterm elections, Joe Biden will still be president and his administration will still be in charge. For that matter, if Republicans take control of Congress this time around, they will want to win elections in 2024, so these political considerations are quite real.

The northern European hawks have the upper hand at the European Central Bank, at least for the moment, as investors look for a hike in the policy rate of at least 75 bp, and perhaps even a full percentage point at the governing council meeting this week.

The voices of doves like ECB chief economist Philip Lane, who has argued that inflation caused by energy shortages from the Ukraine war are less susceptible to interest-rate hikes, have receded as inflation shows itself more broad-based.

The UK has been on its own track, but some measure of calm has been restored with the choice of former finance minister Rishi Sunak as prime minister to replace the ill-fated Liz Truss and her poorly timed plan for trickle-down stimulus.

Sunak is expected to keep the moderate Jeremy Hunt as his finance minister and to present a plan on schedule next week to reduce the UK’s burgeoning debt. Sunak quickly brushed aside any suggestion of a general election to get a new mandate, relying instead on the comfortable majority Boris Johnson won in 2019. 

Sunak has until the beginning of 2025 to persuade voters this party can put Britain on the right track, but his first challenge will be to keep his MPs in line as many of them don’t like his policies. 

Bank of England Governor Andrew Bailey, meanwhile, can stop fighting fires from a bond sell-off and can get back to tightening monetary policy to combat the UK’s own virulent inflation.

The central bank has said it will start selling some of its government bond portfolio Nov. 1, the day after the government’s planned fiscal plan is released, and the Monetary Policy Committee is due to meet Nov. 3 to discuss interest-rate hikes.

Latest comments

if Fed decision reflects that they are serving their political masters and not monetary policy of US then it will the biggest disaster to already tainted image of US as sole super power of the world.
The FED has become political and will slow rate increases or even reduce rates to secure a Democratic victory. Either they do another 75 to 100 point hike to smash inflation or they will prove thier political bent. Which will allow inflation to spiral out of control to the point that the government will need to start nationalizing industry. Say it cant happen here … just look what they got away with in 2020.
Childish market manipulation to get a blue election
Powell said higher rates, longer period of time. If they deviate from that, they fail at their self- stated goal of being inflation to 2%. Powell would lose what little integrity he has now.
Hello
No comments seen anywhere of the ramifications of using a sledgehammer to lower inflation to 2%. We learned the hard way that it takes a LOT of stimulus to resuscitate an economy from a COVID related shutdown.
FEDS soft stance will not reduce inflation. Policy must be tight now, unfortunately, there’s no other way to bring down inflation. Bitter but hard fact
the FED is illegal. Federal reserve act of 1913 signed when nobody was paying attention jeckell Island on Christmas Day
yes right inflation is what they always want 75 basis is no hike see Russian and Chinese hike 800 basis point in one shot
The FED should've hiked directly to their so-called neutral long ago. The FOMC meetings are nothing but a shop for political influence.
So you cited two Fed doves and some money managers who are afraid the won't claim their exorbitant fees when people withdraw their funds? How would so few people be relevant?
Sternlicht is wrong. Poor guy is more worried about being able to afford the stuff he needs than about loosing his job. Social unrest there will be if inflation remains high or is getting higher. Poor guys will always find poorly paid work because nobody likes to do this work. But he cannot flee from high prices in the grocery store. What Sternlicht and his peers fear is loosing 30 percent...
I am amazed at some people's ability to argue against historical precedent. Thanks for your alternative scenario - entertaining for those willing to detach from reality.
Get real, Brad. This time is different
 Well, now you are arguing against yourself: "Poor guys will always find poorly paid work..." Is it the same as always or different this time? You seem confused.
political hoax of a rate decrease just before an election., it's called October suprise
Patel Darpan.  Let's hear your original thoughts instead of someone else's.
Now we have the DOJ and FBI coming forward with an announcement about foreign countries interfering with our elections.  LOL.  Will that be their excuse for losing or becoming election deniers themselves?  This would all be hilarious if it wasn't so pathetic and obvious.
I wonder where you got that material Patel Darpan?
When 98% of your economy is dependent on fossil fuel and you crush the oil industry problems will arise.  The inventory of diesel is down to 25 days!  Joe Biden and his administration is an embarrassing failure!
@me ish: You are welcome to spout antisemitism on platforms that allow it.
 Please Point out between quotation marks what part of his post fits your description of it.
 Waiting on you!
The Biden administration is an embarrassing failure.
When 98% of your economy is dependent on fossil fuel and you crush the oil industry problems will arise.  The inventory of diesel is down to 25 days!  Joe Biden and his administration is an embarrassing failure!
At least people are starting to see that inflation didn’t come from Biden’s war in Ukraine, or high gas prices. It was caused by printing money, to overstimulate the worn out Nasdaq during the global communist’s response to Covid.
Where was the criticism when he was part of the 10 trillion dollar covid problem that exasperated this inflation problem?
us fed meeting which date
Nov 2nd
Biden is a failure!
Fight the Fed. Accept high inflation just so complaining fund managers can have higher profits.
the thing is hyperinflation is going to destroy the economy anyway - it's only a matter of how and when the economy and markets absolutely tank - this is the end of a 90 year economic cycle starting at the bottom of the 1929 crash which led to the Great Depression - it's inevitable. With debt to GDP ratios at all time highs and thousands of zombie companies relying on rolling over zero interest rate debt, this is going to be a humdinger of a crash
We have 1 percent of the world population (bankers, corporations and their associates) who can print money at will through the central banks they own WITHOUT having to disclose how much money they printed and spent (central banks are not publicly-owned corporations so they cannot be forced to open their books and explain how much money they created out of thin air and to whom they gave it). And then we have the rest of YOU who have to simply slave away your entire lives just to get some of that worthless money to pay the rent and buy food. The 1 percent don't work: they just order you around. Now that they think there are too many of you around, they created pandemics, wars and inflation to cull the herd. This is what you want, this is what you get.
not all central banks functions like you claim. most have to show there books 😸
@saun: And your evidence for these grand conspiracies of yours is what?
The Fed refuses to disclose its dealings in the gold market. Look up GATA.
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