As noted moments ago, the market convulsed and tumbled when after the Fed hiked by a somewhat dovish 75bps (market was pricing in 25% chance of a 100bps), attention turned to the median 2023 dot which came in very hot, with the median at 4.6%, above the Goldman “hawkish” range of 4.25%-4.50%, and suggesting that the Fed will power on with even more rate hikes than some of the biggest hawks had expected in 2023, until such time ostensbily as the economy is in a deep recession. And sure enough, the implied odds immediately shifted to reflect the latest dots with both March and May now showing 4.6%…
… with the market pricing in an almost certain 75bps in November.
But a closer look at the latest dots reveals something curious: while we are fairly confident that the recession will be on deck long before the Fed can hike to 4.6% in early/mid 2023, and in fact just weeks after the midterms we expect the BLS to “unexpectedly” reveal just how ugly the labor market is, a look at the 2022 dots…
… reveals the following, as Omair Sharif of Inflation Insights has pointed out.
“The 2023 dot at 4.4% is very evenly split between 4.125% and 4.375%. There are 9 dots at 4.125% or less, 9 at 4.375%, and one at 4.625%. So, the 10th dot is the median (19 dots), but if one were to slip, the median would have been 4.1%. So, that should temper a bit the odds that 75bps is a lock in November (although it seems likely).”
So for those asking if the Fed will really hike 75bps one week before the critical midterms, a hike which would likely send stocks tumbling and not have a very favorable outcome on Democrat election chances, the answer is most likely no.
There’ more: while the market’ attention is focused on the coming rate hikes, Bloomberg’ Ira Jersey looks at 2024 and onward when the Fed will be in rate cutting mode. He points out the following:
“All the attention is on the 2022 and 2023 dots, but the significant dispersion of the 2024 and new 2025 dots in the dot plot is interesting to me. Some FOMC members see about 100 bps of cuts in 2024, with more in 2025. The long-term dots are basically the same (which isn’t surprising), and about a third of the committee sees cuts to the 2.5% range by the end of 2025.”
Translation: the market is gyrating like crazy on what is clearly guesswork by a “transitory inflation” committee that has been wrong about everything in the past decade. As for the data-dependent Fed, just wait until the midterms are over and the real labor market data starts coming out…