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Rex Nutting: The Fed isn't indifferent to keeping inflation on the ground, so don't misread its minutes

The Fed is not as mysterious as one might think. It does not hide encoded messages in its communications. It’s not using an obscure metaphor that seems to say one thing but actually means the opposite. There are no secret chords that only truly religious people can hear.

When Fed policymakers said in the minutes of their July 26-27 meeting that they were all “highly concerned about inflation risks,” they meant it. When they say “there is little evidence so far that inflationary pressures are fading,” they mean it. They mean it when they say inflation “is likely to remain uncomfortably high for some time.”

READ MORE: Fed officials support higher interest rates to slow economic growth, minutes show

Resolute hawks

Above all, when they unanimously agree that the risk of persistently high inflation makes it necessary to raise federal funds FF00, when they were serious about the last month’s increase of 0.75 percentage points to 2.25% to 2.50%, they expect “a continued upward revision of the target range is appropriate”. The Fed remains firmly hawkish (biased towards higher rates). There are no hidden, secret dovish messages in the minutes of July 26-27. But some have found one in any way. As MarketWatch’s Isabel Wang reported on Thursday, many stock market participants initially misread the minutes of Wednesday’s meeting, believing the Fed was tacitly pulling back and signalling a “dovish turn.” But by Thursday’s trading session, markets appeared to have the Fed’s actual message.

Merely talking about risk does not mean The Fed will act.

One of the things that is confusing about the Fed is that it takes a “risk management” approach to monetary policy. In practice, risk management means considering all significant risks (even improbable risks) and developing policies to maximize benefits and minimize costs. This means that the Fed does not automatically set its policy to the most likely outcome, but to the most dangerous outcome. Right now, every member of the Fed’s policy committee sees the greatest risk of persistent high inflation. But that doesn’t mean there aren’t other risks to consider. BREAKING NEWS: Fed’s Bullard says he leans towards 0.75 percentage point rate hike in September

There are no signs that inflationary pressures are fading.

Market Watch

Toothless Feeding

The minutes of the July 26-27 meeting mentioned two other significant risks. The first is that when the Fed says its priority is to curb inflation, the public won’t believe it, even if it means falling SPX in asset prices, +0.23% Dow, +0.06% and higher unemployment rate. If the public does believe that the Fed is toothless, it will start to expect higher inflation in the future. And, according to theory, this would exacerbate inflation, making it harder to keep it in the 2% range. The Fed’s fears are justified: Whenever financial markets get a little cold, the Fed cuts rates and prints money. The market still believes in the Fed’s puts, and the only thing that will convince investors that the puts are gone is that the Fed will continue to fight inflation, regardless of a bear market or recession. This risk supports a hawkish Fed. BREAKING NEWS: Fed’s Kashkari says he doesn’t know if central bank can lower inflation without triggering a recession Second A risk is just the opposite. “Many” participants, thought to be at least five but fewer than nine, cited the risk that the Fed could raise interest rates to fight inflation, the minutes report said. If that happens, the Fed will unnecessarily stifle the economy, miss its goal of maximizing employment, and put its political independence at risk. This risk supports a dovish Fed…eventually. No one at the Fed thinks policymakers have gone too far; that’s something to worry about next year or the year after. But it was that comment that led markets to misunderstand the Fed’s promise to squeeze inflation out of the economy. BREAKING NEWS: San Francisco President Daly says Fed doesn’t want to raise rates ‘excessively’ Fed must consider all major risks, but just talking about risks doesn’t Means the Fed will act. I wouldn’t be surprised if everyone on the Fed committee (not just “many”) sees a hard landing from excessive tightening (a jobs-killing recession) as a real risk. After all, the Fed almost always goes too far, one way or another.

High bar before reversing course

But there is nothing in the minutes that the Fed is starting to show indifference to big rate hikes in the next 12 months or so . As a result, the fed funds futures market sees little chance of a rate cut in the first half of 2023. As recently as August 4, the futures market was pricing in a 25 basis point rate cut by the Fed by July. 2023. The overwhelming message from the Federal Reserve in recent weeks and months is that it will do what is necessary to achieve price stability. The bar for the Fed to reverse course is very high. That’s not going to happen when inflation is still blazing. Don’t just take my word for it. Citi’s chief U.S. economist Andrew Hollinghorst said: “As long as underlying inflation remains well above target and not convincingly slowing, a company that values ​​its ‘determination’ to fight inflation The committee is unlikely to become more dovish.” Mark Haefele, chief investment officer, UBS Global Wealth Management +0.2% MoM) A price increase is a minimum requirement Support suspension. We maintain the rate at which the Fed will raise interest rates view. Another [point] before the end of the year, and if inflation does not slow as we forecast, there is a risk of further rate hikes.” The Fed is not playing a game. Of course, the Fed is trying to manipulate us, but it is obvious that it is doing so. The Fed has clearly told us its thoughts and plans. It ditched Alan Greenspan’s mysticism long ago, but for some reason, many market participants and media pundits insisted on parsing every word of the Fed’s communications to discover the secret meaning within. The Fed’s battle plan is no secret. Of course, such plans will always change, but only when circumstances demand it. For now, the Fed’s plan is a direct frontal attack on inflation, regardless of collateral damage. Really means that. Rex Nutting is a columnist for MarketWatch who has been writing about Articles on the Fed and the economy. over 25 years.

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Inflation has yet to peak as rents are still rising fast Wages are still rising faster than the Fed can handle. That means more rate hikes and layoffs are coming. Everything you need to know about the recession we are definitely not in right now



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