25 bps rate hike as the Fed sees “disinflationary” process underway
The Fed’s torrent pace of rate hikes finally took a breather last week, downshifting to 25 bps for the first increase of 2023. Last year saw rates jump from 0.25% in January to 4.5% by December. Along the way, the Fed eased into the rate cycle with one 25 bps in March followed by a rapid succession of heftier 50 and 75 bps hikes. All said it done, 2022’s hikes amounted to one of the quickest rise in rates in history.
With “the disinflationary process starting” according to Powell, noting the slowing in the pace of inflation, 25 bps strikes the goldilocks approach of continued inflation vigilance while signaling a possible peak in rate hikes is nearing. After all, inflation is still raging at 6.5%, housing is still solidly elevated and the jobs market continues to chug along with unemployment falling once again to 3.4% (the lowest level since 1969) after a massive jobs report dropped last Friday. 517,000 jobs were added in January against the expectations of only 185,000. Small miss, eh?! With the jobs report delivering a massive outperformance vs estimates, there was good reason for the stock market to take a beating to wrap up the week.
It’s too simple a theory to belief inflation will suddenly go back to 2% and the interest rates fall right alongside it. Getting “back to normal” like the decade preceding still feels possible as the market’s hay days are still fresh in collective memories. But might things be different for the 2020’s and 2030’s? Powell studied the 1970’s, the last time inflation ran amuck, and seems determined now to make the same mistake as the stop-and-go policy makers made then.
Jobs appear to the factor for us all to key in at the moment. After all, a tight labor market puts upward pressure on wages, which finds its way into the economy through all sorts of consumer spending, mainly housing. To see the unemployment rate do nothing but drop further since rate hikes began must be frustrating for the Fed. But after all, we’re only 10 months into the current rate hike cycle so there’s still a ton more action to play out as the effects of tighter liquidity impacts asset markets in the coming 6 - 18 months. I suspect the volatility party ain’t over yet.