A Hawkish Fed (for now) and its Implications

 The gist of Today’s FOMC Meeting Press Conference:

“Let me say this, it is very premature to think about pausing. ” – JPow

Today’s message from the Fed was HAWKISH, relative to market expectations.

The key part of the Q&A was when Chairman Powell said that he would rather risk over tightening, because he can always loosen monetary policy to stimulate if need be.

So at this point, it all boils down to a big game of chicken, so to speak, between the bond bulls (aka deflationists, who expect a weak Fed) vs. JPow over the unemployment rate.

He also mentioned that the ideal would be for real rates to be positive across the entire yield curve. This passing (yet important) comment leads Giza Capital to believe (along with the update in the latest Fed’s SEP report) that the terminal Fed Funds rate target (as of today’s data) is between 5.0 – 5.5%, which is 100 bps higher than our late summer forecast*. At 5%, if inflation is persistent in the short-term, then this would match the current Core PCE rate, and then start to tip-toe into “real yield” territory**.

We expect more bond market volatility in the next two quarters, increased VIX, and assets with long-duration exposure to have increased risks, moving forward.

*Update (11/05/2022): Increased our terminal Fed Funds Rate prediction to 5.5 – 6.0% based on Friday’s economic data.

**Update (11/10/2022): Decreased our terminal Rate prediction to 5.25 – 5.75% based on Nov.10th decelerating inflation data. 

^Above is NOT investment or financial advice.