The Waiting is The Hardest Part

Key points

  • The new Powell arithmetic: The Fed and the rates market believe that policy is restrictive. But uncertainty remains as the Fed signaled additional hikes and bond markets have priced in a higher probability of additional “insurance” hikes before pivoting to rate cuts later this year.
  • Pressing “pause” for long and variable lags: The problem with the view that policy is restrictive is that there’s little evidence of easing in measures of inflation and economic growth. Is this due to the assumed long and variable lags of monetary policy or a potential measurement error?
  • Are recession probabilities overstated? Economist forecasts call for a hard landing, but continue to push out the timing of the hard landing in the face of economic strength. Recent market performance indicates that traditional forecast models may be overstating the timing of the arrival of any recession.

The US Federal Reserve (“Fed”) paused rate hikes in June, but signaled it expects to deliver 50 basis points of additional hikes this year. Will that be restrictive enough to achieve their inflation targets? The waiting is the hardest part.