Wall Street is wondering what the endgame of the Federal Reserve will be because it has major implications for businesses, workers, consumers and investors. The entire situation has changed. While all last year, investors were wondering how much the Fed will hike rates each time they were meeting the focus has changed to, when will the Fed stop hiking rates and how long will it take to lower rates again.
For most of 2022, the biggest questions for investors were how high will inflation go and when will it peak? But now we know that so far inflation peaked in June at a year-over-year rate of 9.1%. Suddenly inflation is coming down across the board, but inflation at 7.1% is still far above the Fed’s stated target rate of about 2%. So, what will the Fed do?
The futures market expects the Fed to hike rates twice, by another 0.25% when it meets in early February and in March. Then, the Fed is expected to pause.
But is this really what Fed Chairman Powell and his colleagues have on mind? At his press conference last week, Powell was asked whether the Fed might change its target inflation rate, perhaps target for an inflation of around 4% which would be much more realistic next year than 2%. But is response was pretty clear that he will not having any of that: “We’re not going to consider that. Under any circumstances”.
Pushing inflation all the way down to the Fed’s 2% target could take a long time. Doing so would likely have a very strong impact on the U.S. economy and the stock market could dive.
Sven Franssen