Dominic Pino writes:
Based on market predictions and overall economic conditions, and given that the Fed — both in recent history and over its entire history — is usually behind the curve, a hike higher than the markets were expecting would have been welcome. Instead of talking about how the Fed got surprised yet again, Powell should have been the one doing the surprising.
So, while a 75-basis-point hike was a good thing to do, 100 basis points would have been better. Remember, real interest rates are still well in negative territory, and a 2 percent federal funds rate would hardly be radical.
As always, read all that Dominic has to say, but what is key (to me) is that the Fed needed to surprise, and it didn’t. Last week 75 basis points would have been a surprise. Today, not so much. Markets move.
I wrote this last night:
The Fed, which was complacent for far too long, now needs to step up with a rate hike to confirm that it, at least, is finally taking inflation seriously. To have a chance of doing that, it should hike by more than expectations, which currently appear to be rising from 50 basis points to 75. Is 100bp unimaginable? Not entirely, but, if the Fed is serious, 50 bp should be.
By this morning, 75bp was more or less priced in. When that number was announced, it sent stocks up (the S&P ended 1.47 percent up), but this move looks (to me) more like a relief rally — investors were relieved that Powell had shown his seriousness about inflation by rejecting 50bp. And that relief was supplemented by the fact that Powell appears willing to contemplate another 75bp on top of it. That may be interesting for two reasons: It shows that, for now, investors are more worried about inflation than a slowdown (or maybe that they are more worried about stagflation than a slowdown; there’s a thought) and it shows that they are easily pleased: Of course, the next increase should be 75bp. No contemplation required. However, even if the S&P ended higher, it ended the day off its peak, something (short-term profit-taking aside) that might suggest that the relief was not uncontained.
And take a look, as Dominic suggests, at real rates. Even though tightening has an effect equivalent to an additional rate increase on top of the 75bp, today’s announcement can hardly be said to represent a dramatic crunch in any real sense of that word.
Unless of course, assets have been wildly bid up (and too much debt incurred) as a consequence of the ultra-low interest rates of recent years.
And there is no way that that could have happened, not at all.