Fed Funds 6% Anyone?

The US Federal Reserve delivered precisely to our forecast script. Going on hold for just the moment, but emphatically emphasising there are more rate hikes to come.

This was our forecast. As has been our consistent expectation that what we will see is the Fed hiking at every second to third meeting all the way through to year end.

This on-going tightening process could take the Fed Funds Rate to 6% by year end.

Not what the market had been expecting. The market had been bizarrely fixated with fantasy pivot expectations? We have consistently pointed to stubborn inflation, the headline may be 4%, still too high, but core inflation is at a whopping 5.3% and services inflation may even accelerate.

A year ago, I forecast the terminal rate for the Fed in this cycle could be as high as 6.5%, or even 7.5%. We have called it well and remain on a reasonable trajectory toward such extreme levels. Unfortunately.

None of this forecast has been based in the belief that this is what the Fed should do, but only based on the expectation from the very beginning that the Fed would fall well behind the curve and then to make matters worse, tighten too aggressively.

This is precisely what is happening. The Federal Reserve is using last century’s text book to decide this century policy responses. It is not working. Inflation is rolling over largely due to the supply side shocks moving out of the data and the natural economic slowing that was due in any case. What the Fed is actually doing is creating a banking and credit crisis that will likely drive the US economy into a far deeper slow-down and recession than is actually necessary to curtail inflation fully.

The previous inflation controlling globalisation pressures were suddenly ripped away by Covid lockdowns and subsequent trade interruption. Which freed the entire global business community to ignore competitive price pressures, they no longer existed, and to raise prices sharply. Thereby fattening profit margins. This was a primary driver of the global inflation wave. The old world ideas of fighting such pressures with severe rate rises were always going to prove problematic in the contemporary space.

The Federal Reserve, and other central banks like the RBA, have actually engineered a roller-coaster economy. The tail end of which they are having trouble coming to grips with.

The Fed will continue to hike rates in error, and the ramifications for the real economy could be far more severe than any of us can foresee.

There is no question the US economy will continue to slow in the midst of this rather ugly matrix of economic forces.

The suggestion here, is to remain cautious of the sustainability of current equity market strength.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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