- Illusions about a September pause are dead
Today’s US inflation report laid bare some of the lies the market has been telling itself in the past few weeks.
- The idea of a September pause is ridiculous. June, July and Sept Fed meetings will all be 50 bps hikes, with risks of even more.
- The Fed is way behind the curve
- The odds of the Fed hiking the economy into a recession are high
Politically, the Fed is in a tough spot. They were so wrong on inflation that they have no credibility left to say ‘let’s wait and see’. They have to hike until inflation breaks. But Fed have a lagged effect so they’ll be hiking after the time when they should pause.
The market is now pricing in year-end Fed funds at 3.08%. Which is a long ways from the 0.75% Fed funds rate currently.
As you can see, investors don’t want to hold stocks into that relentless headwind.
For the US dollar, the hikes are positive on a standalone basis but the risk aversion is also a draw for the dollar.
