A Turn or a Hiccup?
The Fed decision was undoubtedly a surprise last week. The dots moved further than nearly anyone anticipated but it wasn't just that. After all, the dots have a poor track record of predicting rate moves and have been too hawkish since they were introduced. What also changed was that Powell went from a wait-and-see mode on data to anticipating strong jobs numbers while beginning to fret about higher prices.
On Friday, St Louis Fed President (and noted hawk) Jim Bullard underscore the Fed messaging by saying the Fed needs to be ready to taper and that inflation data has been more intense than expected.
What may have been less appreciated was how he benchmarked his rate hike on economic data. He said that strong inflation of 2.5-3.0% through 2022 would meet the framework for justifying a rate hike.
That's still a high bar.
Many market watchers are declaring the current round of high inflation as the overshoot that the Fed wanted but that's not the case. Even Fed hawks haven't abandoned 2022 inflation as that period.
Ultimately, the market will fall back on looking at inflation and prices rising as high as Bullard is forecasting is far from a sure thing. Some of the bottlenecks pushing up prices now – used cars for instance – will create disinflation pressure in the year ahead, assuming that they unwind.
So while we have seen some impressive moves that have no doubt been exaggerated by short covering, we're probably not yet at the big turn in markets. The question through is how far to ride this move and when to fade it.Monday's price action will offer plentiful hints.
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