- U.S. Federal Reserve Chairman Jerome Powell confirms money market manager sentiment that the central bank is set to hike rates by 50 basis-points in May.
- Most estimates put at least one 0.50% hike in rates in May, one in June, but the outlook for July remains debatable as policymakers attempt the unlikely – a soft landing for what they view is an overheated U.S. economy.
Just yesterday, this newsletter suggested that investors should be thankful if the U.S. Federal Reserve raised interest rates by 50 basis points in May and money market managers were already pricing in such a hike.
Yet somehow, markets were taken aback when U.S. Federal Reserve Chairman Jerome Powell reiterated what many knew all along, that a 0.50% increase in rates was on the cards.
At an IMF-hosted panel on Thursday in Washington, Powell noted,
“I would say that 50 basis points will be on the table for the May meeting.”
More importantly, Powell was of the view that demand for workers was “too hot” which suggests that the needle has swung to the other end, on concerns that wage hikes could set off a wage-price spiral of inflation that runs away from anything monetary policy can solve.
With the Fed facing down the hottest pace of inflation in over four decades, Powell suggested that “one or more” 50 basis point hikes could be appropriate to reign in price pressures.
Which suggests that the Fed isn’t necessarily out to raise the bar to 50 basis points as the table stakes for every policy meeting, something that Powell himself alluded to when he noted,
“There’s something in the idea of front-end loading.”
Meaning that while the central bank may hike by 0.50% in May, that doesn’t necessarily mean that every meeting there after for the rest of this year will start from this point.
So far, investors are betting on half-point hikes in May, June and possibly July, but beyond that the jury is still out on where policy is headed.
And while policymakers want to achieve a Goldilocks landing for the U.S. economy, not so loose that inflationary pressures increase, but not so tight as to trigger a recession, they’re using the most ill-suited tool to achieve it – monetary policy.
Monetary policy is the equivalent of using a jackhammer to crack open a walnut and hoping that there’s something left to eat at the end of the exercise and risks are piling up that policymakers will get it wrong.