Looking for a Signal From Jerome Powell

DESPITE THE LIKELIHOOD OF TWO SUCCESSIVE QUARTERS of negative GDP growth, as inflation shows signs of cooling, the Federal Reserve is likely to impose another huge rate hike this Wednesday on an economy that appears perilously close to recession.


Chances of a 75 point rate hike: 80 percent.

Chances of a 50 point rate hike, 20 percent.

Chances of a 100 basis point move, zero percent.

THE REAL NEWS will come from the FOMC statement and Jerome Powell’s press conference, which could offer hints about policy this fall.

THE PRESS WILL HAMMER AWAY THIS WEEK at a fundamental issue: how can the Fed raise rates aggressively if the economy contracted for two successive quarters? The Atlanta Fed is predicting a 1.6% decline in second quarter growth after a 1.6% drop in the first quarter.

COULD THE SECOND QUARTER GDP report, due on Thursday, lead some economists to conclude a recession has arrived? Two successive negative quarters may not be enough to conclusively prove that a recession has arrived — but it may convince jittery consumers that the slump has intensified — despite a 3.6% unemployment rate.

RETURNING TO OUR RANT from earlier this summer, the Fed seems to be behind the curve. It’s pretty clear that the economy is softening — just look at housing, a fairly significant gasoline price drop, and tentative signs that hiring is slowing. The Treasury 10-year bond is reflecting this.

THUS WE THINK A CASE CAN BE MADE for a 50 point rate hike on Wednesday, but the Fed needs one more “shock and awe” move to show the markets that it is serious about fighting inflation. But even the hawkish Powell may hint, in his press conference, that the Sept. 21 move could be somewhat less aggressive.

WITH WASHINGTON ABOUT TO SHUT DOWN for the late late summer recess, there’s surprisingly little controversy over the Fed’s aggressive tightening. In both parties, and at the White House, there’s a consensus to leave the Fed alone. There are a few critics — Larry Summers favors more aggressive tightening, while Sen. Elizabeth Warren wants to Fed to go slow — but Powell essentially has little opposition.

OUR BOTTOM LINE IS THAT A CONSENSUS MAY GROW — as the late-August Jackson Hole meeting approaches — that the pace and magnitude of rate hikes may begin to slow appreciably by late fall, especially if third quarter GDP growth also looks mediocre, with gasoline falling below 4 dollars a gallon by Labor Day.

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