Maverick conducts a review on the recent FOMC Jpow conference here.
Below are points/notes from the video that I think the forum or TF haven’t quite covered yet.
When will the rate hikes stop? 3 conditions.
Jerome Powell gave 3 conditions to allow for the pausing of rate hikes:
- Growth moving down.
- Unemployment going up.
- Inflation moving down towards 2%.
These 3 ingredients = recession. JPow is looking for a recession.
Most Important Piece of Economic Data for JPow: Core PCE
JPow stated that the main incentive for aggressive front loading of rate hikes is the core PCE, not the CPI, not the PPI. The inflation target is 2%. Currently the core PCE at a 3, 6 and 12 month trailing annualized basis is at 4.8%, 4.5% and 4.8% accordingly.
Think back to Volcker. This means the fed funds rate needs to be at least 5% to meaningfully drive down core PCE. We are now at 3.25%, which means we have 175 bps of rate hikes to come.
The 2Y yield is another indicator of more rate hikes. The 2Y is above 4% right now. The fed is always chasing the bond yield. For example, soon we will see 5% 2Y yield and the fed funds rate will be 4ish%, then a 5.5% 2Y yield and fed funds rate of 5%, etc.
In order to show that the fed is in charge, they would need to immediately hike rates to 5% above the 2Y yield, above the core PCE.
Was there anything at all for the bulls and doves? Yes-ish.
- JPow is seeing some evidence of the beginning of supply chain restoration.
- Commodities peaking.
- After initially playing down the possibility of a soft landing near the start of the conference, JPow shifted tone to say that they are keeping an open mind on the possibility of a soft landing achieved by job openings coming down without unemployment rising too high.