Yes, that is correct. Today’s release of Fed committee notes from the May 4th meeting indicated a resolve to “do what it takes” to tame inflation. Usually a Fed announcement like “we judged that 50 basis point increases would likely be necessary at the next couple of meetings” would trigger major volatility in stock and bond markets. Today, however, stock markets rallied and bond markets held firm. Why? Recent quarterly earnings reports by Fortune 100 corporations and plummeting stock markets have shown inflation is hitting the bottom line hard. Remember, 2021 featured trillions of dollars in stimulus, the lowest interest rates in modern history, and some “transitory” inflation. The punch bowls have all been pulled from the table and the lights are on, reality is setting in. A return to normalcy is predicated on inflation being brought down to the Fed target of 2.0% (most recent reading: 6.6%). The Fed notes indicated unanimity on the rate hiking plan. Markets are cheering the determination and resolve (although some believe it should have been shown earlier).
Bottom Line: The “next couple of meetings” means 50 basis point increases are guaranteed for the next two meetings: June 15 and July 27. Futures markets are at 90% on both of those moves – that puts the Fed Funds target rate at 1.75% after the July meeting. What next? The traditional August break with the next meeting on September 21. So, the Fed will have almost 2 months to gather data and gauge the effects. The September increase may be 25 basis points (futures markets are at 67% for the smaller increase). Again, the Fed invoked their willingness to go “above the neutral rate” (2.4%) into restrictive territory, if necessary to battle inflation. The next few inflation readings will be very closely watched, starting with this Friday’s release of the April 2022 PCE (the Fed’s Preferred Inflation Gauge). Over the next few months, that along with CPI/PPI will be critical as markets watch for signs that inflation is peaking or retreating. Interesting “coincidence” – a Fed Funds rate above the neutral rate would put it at 2.75%, exactly where today’s 10-Year Treasury is at (down from 3.20% on May 6); with 30-Day SOFR at 0.98% and 30-Day LIBOR at 1.01%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
