Here’s why more Fed officials are warning the market is getting ahead of itself

Markets / August 2, 2022 / Admin / 0

Topline

A growing number of Federal Reserve officials oppose the latest market rally, dismissing recent optimism about an upcoming monetary policy ‘pivot’ as wishful thinking and warning that the central bank will be forced to keep rising. rates aggressively until inflation drops significantly.

Fed officials say the central bank is far from a monetary pivot.

Al Drago/The New York Times via AP, Pool

Highlights

Markets hit their best month since 2020 in July, boosted by optimism that inflation may have peaked and the Federal Reserve may soon reverse its aggressive monetary policy tightening.

Not so fast, according to a growing number of Fed officials who have spoken in recent days and warned that the market is getting ahead in anticipation of a monetary pivot, which they say won’t happen anytime soon.

The Fed is ‘far from nearly over’ in its ongoing inflation battle, while strong rate hikes so far don’t necessarily mean the central bank won’t seek to keep raising rates , San Francisco Fed President Mary Daly said in an interview on Tuesday.

Cleveland Fed President Loretta Mester, meanwhile, noted that “we haven’t seen inflation subside at all” and that the central bank will have to keep raising rates until it does. see “irrefutable proof” over several months that inflation has reached its first peak.

Speaking to reporters on Tuesday, Chicago Fed Chairman Charles Evans also agreed that the Fed will continue to raise rates for the foreseeable future, expecting a “reasonable” 50 basis point increase when the next meeting in September, although he said “75 might also be OK.

The recent remarks by central bank officials follow a similar comment by Minneapolis Fed Chairman Neel Kashkari, who told CBS on Sunday that while the Fed still has a “long way” to go, it remains “ determined to drive down inflation…whether we’re technically in a recession or not.

Crucial quote:

On Monday, former New York Fed Chairman Bill Dudley warned in a Bloomberg op-ed that monetary tightening will last much longer than expected. He criticized “wishful thinking” in the markets, calling investors’ speculation of a Fed “pivot” “exaggerated and counterproductive”.

Key Context:

The Federal Reserve has raised interest rates four times so far this year, with the federal funds rate now sitting at 2.25%. The central bank recently raised rates by 75 basis points last week, following a 75 basis point increase in June, the largest in 28 years. Fed officials led by Chairman Jerome Powell admitted last week that with business activity having “slowed down”, the central bank remains “very attentive” to inflation risks. With consumer prices remaining at 41-year highs and operating at an annual rate of 9.1%, traders expect a further rate hike of at least 50 basis points, according to data from the CME Group.

To monitor :

“This string of Fed speeches suggests that markets may be a little too bullish on pricing in a Fed pivot and calls for lower rates for next year are overly bullish,” says Edward Moya , senior market analyst at Oanda.