Fed Rate Hikes Approaching The “Breaking Point”

Last week, the FOMC published its minutes from the September meeting, confirming its recent stance that Fed rate hikes will continue until inflation is vanquished. To wit:

“Many participants noted that with inflation well above the Committee’s 2 percent objective and showing little sign so far of abating, and with supply and demand imbalances in the economy continuing, they had raised their assessment of the path of the federal funds rate that would likely be needed to achieve the Committee’s goals.”

As noted previously, the problem with this view is that the Fed is managing monetary policy based on lagging economic data.To wit:

As the Fed continues to hike rates, each hike takes roughly 9-months to work its way through the economic system. Therefore, the rate hikes from March 2020 won’t show up in the economic data until December. Likewise, the Fed’s subsequent and more aggressive rate hikes won’t be fully reflected in the economic data until early to mid-2023. As the Fed hikes at subsequent meetings, those hikes will continue to compound their effect on a highly leveraged consumer with little savings through higher living costs.

Given the Fed manages monetary policy in the “rear view” mirror, more real-time economic data suggests the economy is rapidly moving from economic slowdown toward recession.”

While Fed rate hikes remain Powell’s preferred tool to combat inflation, the reality is that inflation will drop markedly over the next several months. Such is something we wrote in early October.