Fed Signals Two Hikes By End Of 2023

“Inflation has risen, largely reflecting transitory factors,” the Fed said Wednesday, in a June policy statement that contained few surprises.

The dot plot now tips two rate hikes by the end of 2023. That could reasonably be construed as a hawkish tilt, although I’d gently suggest that adjectives like “shocker” and “super-hawkish” (both heard in and around the release) are a bit overblown.

Seven officials see a hike by the end of next year compared to four in March, “not sufficient to get the median forecast off zero, but clear evidence of the growing support for normalization,” BMO’s Ian Lyngen remarked.

The obligatory media circus notwithstanding, most serious market observers (and honestly, I don’t even know what a “serious” market participant looks like anymore) expected the June FOMC to be a non-event.

That assumption didn’t preclude gaffes, jokes and missteps during Jerome Powell’s post-meeting presser, but there was virtually no chance the statement would contain anything of substance.

The Fed “will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” the Committee said, reiterating the status quo on monthly asset purchases. This month’s edition of BofA’s Global Fund Manager survey showed virtually no one (less than 5%) expected the Fed to signal a taper this month (figure below).

Assuming there are no monumental shifts in the outlook between now and then, officials will likely telegraph the announcement of a slow taper in August, before unveiling a timeline in September. Presumably, the actual taper would commence in December or January.

Clearly, realized inflation has accelerated, but there’s ample scope for officials to “look through” the data from April and May. Plausible deniability is abundant, even as critics loudly insist otherwise. The new projections show the Fed sees PCE and core PCE at 3.4%/3% this year, 2.1%/2.1% next year and 2.2%/2.1% in 2023, versus 2.4%/2.2%, 2%/2% and 2.1%/2.1% in March, respectively.

To be sure, some of the standard charts look terrifying right now (figure below, for example). But both the YoY and MoM figures are unreliable, at best. We may look back six months from now and declare them wholly useless.

It’s not necessarily that I think anyone should “trust” the Fed’s “transitory” messaging on inflation, although many clearly do. Rather, it’s that I don’t trust anyone else’s assessment either.

Outside of derogatory memes about economists (and Powell isn’t even an economist) and your standard, run-of-the-mill Fed derision, it’s not clear why you (or I) should be any more skeptical of the Committee’s forecasts than you should of predictions emanating from analysts and other economists, let alone sundry @HODLDemons and various @ES1Wizards who, as far as I can tell, spend their days retweeting propaganda and looped Ron Burgundy gifs.

If you’re a Fed critic, I certainly hope you can do better than “Their track record is bad” because… well, because good track records aren’t exactly the hallmark of macro forecasters. Hardly anyone has a “good” track record. Indeed, you could easily argue that when it comes to inflation and, relatedly, bond yields, the only folks with a respectable record are those who predicted disinflation or even outright deflation.

When you hear from “legendary” traders or hedge fund “titans” who (implicitly) claim special macro knowledge, just remember that all it takes is one great trade to make you a “legend.” This isn’t like pro sports, where getting into the hall of fame requires years of consistent outperformance. Trading (narrowly construed) is a game where one wild flea flicker gets you a pewter bust. If you’re a PM, consistent performance obviously matters, but hedge funds haven’t proven particularly adept in that regard during the era of easy money, zero commissions and passive investing.

In any case, the June Fed statement did strike a reasonably upbeat tone in certain areas. “Progress on vaccinations has reduced the spread of COVID-19 in the United States,” the FOMC said, adding that “indicators of economic activity and employment have strengthened” although the hardest-hit sectors were described as “remain[ing] weak” even as they too “have shown improvement.”

Despite progress, “risks to the economic outlook remain,” the Fed remarked, retaining the standard pseudo-warning. Projections for the unemployment rate were largely unchanged from March. As for GDP, the new projections show the Fed expects the economy to expand 7%, 3.3% and 2.4% this year, next year and in 2023, respectively, compared to 6.5%, 3.3% and 2.2% in March.

IOER and RRP were hiked by five basis points.

June dots

June projections

June statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer?term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage?backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.