“Inflict Losses”
We’ve joked that it’s all fun and games until there’s demand destruction and pointed out some of the lighthearted characterizations of the Fed, including its being a party host who has the thankless task of taking the “punchbowl” away. But this week, it appears the joking is being put aside as there are increasing references to economic pain.
On Wednesday, ahead of the Fed minutes release, Lael Brainard, Esther George, and Mary Daly weighed in on their expectations. Brainard, noting “inflation is too high” and the speed/strength of the recovery, said, “I expect the balance sheet to shrink considerably more rapidly… with significantly larger caps and a much shorter period to phase in the maximum caps”. In speaking about Fed Funds, George emphasized the potential for a 50-basis points hike, saying it “is going to be an option that we’ll have to consider”. In addition, Mary Daly had the thankless task of trying to reassure markets that a “soft landing” is possible, saying on the possibility of a recession that, “we could slow so it looks like we are teetering close to it… but it will be a short-lived event I expect, and then we’ll be back up”. Fool me once (transitory inflation) shame on you, fool me twice, shame on me?
Some cynicism is likely warranted if ensuing comments are to be believed. Following the Fed’s release of the minutes, which showed general agreement on tapering caps to the tune of roughly $95bn a month, Bill Dudley wrote an op-ed that dispensed with the pleasantries. The former NY Fed president went straight to the punchline, saying that to be effective, the Fed will “have to inflict more losses on stock and bond investors”. More precisely, financial conditions must tighten, or the Fed “will have to shock the market to achieve the desired response”, concluding that “one way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower”.
P.S. The ECB also released the minutes from its latest meeting this week, with its member agreeing that “for all practical purposes, the three forward guidance conditions for an upward adjustment of the key ECB interest rates had either already been met or were very close to being met”. However, the pain being discussed across the pond is regarding prices, energy, and the ongoing war in Ukraine. As Mario Draghi said succinctly, Europeans may need to decide whether they want peace or air conditioning. What’s more, while the disruptions to the global energy market certainly haven’t helped, a recent article notes that “the world was already facing the risk of gas shortages” before hostilities started and argues that “longer term, the LNG demand-supply balance is expected to get more out of whack”.
P.P.S. While Freightwaves admits it “always calls market moves early”, its CEO Craig Fuller wrote that a “sharp, painful downturn in the U.S. truckload market is imminent” and provides some additional thoughts on the broader economy, warning that “consumers are pausing their spending” and saying that “inflation and high fuel prices will keep consumers on the sidelines”.
Looking for more MI2? Check out Wednesday’s Real Vision Daily Briefing episode, where Julian Brigden went live with Maggie Lake to discuss the latest out of the Fed, the trajectory of monetary policy, inflation, and the broader macro landscape.
