Federal Reserve, Fedspeak – Talking Points
- Federal Reserve officials back out en masse this week
- Guidance welcomed following hot PPI, CPI prints
- Market pricing in close to 5% terminal rate
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Fedspeak returns to the forefront this week as markets digest last week’s hot CPI print. This week is relatively light on the data front, meaning market participants will likely place increased emphasis on Fedspeak along with corporate earnings. Recent Federal Reserve speakers have continued to bang the “hawkish drum,” with most citing a lack of progress on the inflation front as a reason to carry on with aggressive rate hikes.
The continued tightness in the domestic labor market continues to be a talking point for Federal Reserve officials, as recent comments indicate the Fed is looking for some pain in both housing and employment in order to cool inflation.
The tone surrounding a soft landing changed sharply with Chair Jerome Powell’s hawkish Jackson Hole remarks, where Powell fired a shot across the bow of financial markets. Market participants continue to remain steadfast in their desire to price in a Fed policy pivot, but such a change in course for the central bank is almost impossible with inflation sitting where it is. Powell has echoed this in his own remarks, saying that under no circumstance can the Fed afford to have inflation remain high in the medium to long-term.
Fedspeak Calendar
Market pricing has seen the terminal rate for the Federal Reserve approach 5%, with many participants coming to terms with the notion that a policy pivot remains some ways in the distance. As inflation remains sticky, the Fed has the “wiggle room” required to pursue aggressive tightening given the relative strength to peers. While China battles Covid and Europe faces war and an energy crisis, the biggest impediment for the Federal Reserve remains a hot labor market.
So far this year the Federal Reserve has raised the federal funds rate by 300 basis points to the 3.00-3.25% range, with another 75 bps expected at the November meeting. While commentary on rate hikes is plentiful, markets continue to yearn for information on the path of quantitative tightening (QT). While the current rate of balance sheet runoff is well defined, recent questions about financial stability and Treasury market liquidity have reignited the debate surrounding the nearly $9 trillion elephant in the room.
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— Written by Brendan Fagan
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