Fedspeak This Week: Hawkish Intent Remains Intact

Fedspeak, Federal Reserve – Talking Points

• FOMC effectively fully priced for 75 basis point hike in November
• Neel Kashkari calls for 4.5% on fed funds rate in 2023
• Michelle Bowman voices support for continued large rate hikes

Federal Reserve officials have been out “en masse” lately, as the Federal Reserve looks to continue its plan of effectively communicating policy views to the market in a transparent manner. Recent Fedspeak has reiterated the stance that the Fed is nowhere near a “pivot,” given the state of inflation. This morning’s CPI print only reinforces the notion that the Fed has plenty of work to do in the months ahead.

In comments given on Wednesday, FOMC Governor Michelle Bowman said that she will continue to support larger rate hikes as long as inflation shows no sign(s) of decreasing. Minneapolis Fed President Neel Kashkari also revealed that he would like to see the fed funds rate reach 4.5% in 2023, with the Fed then leaving rates elevated for some time.

Fed officials all appear to be on the same page following Chair Jerome Powell’s Jackson Hole remarks, which hinted that the Fed would be tolerant of some pain in the battle against inflation. It would appear that recent Fedspeak is looking to ease the market off of the “soft landing” narrative, as the Fed looks for material slowdowns in both housing and labor markets.

FOMC Rate Hike Probabilities, November Meeting

Courtesy of CME Group

Following this morning’s hot September CPI print, futures markets moved to effectively “fully” price-in a 75 basis point (bps) rate hike from the Fed in November. Current pricing suggests a 97% probability of 75 bps, with just a 3% chance of a full 100 bps rate hike.

While today’s print may not have moved the needle for the November meeting, it certainly opens the door for more rate hikes into 2023. The 2-year US Treasury yield continues to climb as the market works to price in an even higher terminal rate, with the 2-year trading up through 4.53% before easing. As inflation is showing more signs of being stickier than Fed officials had forecasted, Fedspeak may ramp up the hawkish nature in the coming sessions in order for markets to come to terms with reality.

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— Written by Brendan Fagan

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