14 Dec 2022
December FOMC meeting
The Federal Reserve and Jerome Powell have let the markets know what their decision has been for interest rates.
As the members of the FOMC gather around the conference table, the tension is palpable. It's the last FOMC meeting of the year. The economy's fate rests on their shoulders, and they take their jobs seriously. After many discussions, they all agreed on the next interest rate hike.
Jerome Powel bangs the gavel, declaring the meeting adjourned. As the members file out of the room, they can't help but chuckle at the absurdity of it all and what they have done to consumer goods.
The last few days have been full of data for the Federal Reserve; first, we had the PPI report come in higher than expected, and yesterday we had the CPI report come in lower than expected. All this data has not influenced the FED's thoughts presented last month. That inflation is cooling off, and they can slowly take their foot off the gas pedal.
Jerome Powel and the Federal Reserve have raised interests rates with 50bps taking the total interest rate to 4.25%. They have pushed borrowing costs to yet a new high.
When will it end?
I don't know when it ends, and there are so many variables to consider that I can't say when the rate hikes will end. In times of uncertainty, I usually go back and look at previous data and see if we have ever been in similar times. I know history doesn't repeat itself, but it rhymes.
On my journey looking for when this madness will end, I found 2 interesting points given by the great Stanley Druckenmiller:
1) Once inflation gets above 5%, it’s never come down unless the Fed Funds rate is higher than the CPI. (At the time of this post, the current Fed Funds target rate is 4.25%, and CPI is 7.1%. Based on this data, we have ways to go.)
2) Once inflation gets above 5%, it’s never been tamed without a recession
Based on our findings, I can derive some scenarios. The FED is almost done raising rates, but they will still need to cut rates. There will be a time of high-interest rates. Another scenario is that the FED continuously raises rates until they are higher than the CPI print. In both scenarios, it will lead to a recession. So anybody thinking about a FED pivot in 2023 should go back and look at the data before they talk about a pivot.
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