Jerome Powell shocked the perennially optimistic investing class when he made clear that the Federal Reserve isn't slowing down its rate hike campaign anytime soon. However, since the first Federal Open Market Committee meeting the year, more signs point to the Fed not only passing at least one more 25 basis point hike to the federal funds rate, but it might actually once again accelerate its campaign.
For starters, inflation remains far too hot. The consumer price index increased by half a percentage point from the end of last year to January, three times the rate the Fed aim to achieve, with core consumer priuce index inflation, the Fed's preferred measure, which excludes the volatile categories of food and energy, almost as high and rising nearly as fast. Wholesale prices, a leading indicator of the CPI trends to come, rose by 0.7% between December and January, even faster than the CPI. Both headline CPI inflation and producer price index inflation remain three times the Fed's target of 2% annual inflation.
SHAME ON THOSE WHO PUSHED FETTERMAN TO THE SENATE
Then the Fed, which has remained stubbornly committed to the Phillips curve, will surely balk at the latest employment data, which show the job market still far too hot. (Unlike legislators, who ought to be concerned by the nation's abysmal labor force participation rate, the Fed is only primarily concerned about jobless claims — the number of unemployed workers who are looking for work — staying under 200,000 for a fifth week.)
And finally, in a bit of political news, President Joe Biden tapped Fed Vice Chairwoman Lael Brainard as director of the National Economic Council. Although even the most hawkish members of the Fed came around to embrace Powell's push to raise interest rates throughout last year, the Fed's doves are starting to telegraph their departure from the central bank's hawks. While Dominic Pino over at National Review has a compelling case for why Brainard's acceptance of the position undercuts the Fed's independence from political persuasion, there's an obvious silver lining in the short run, for the sake of the nation, and maybe for the Fed's long-term credibility, if my prediction is correct.
Mainly, without Brainard, Powell and the hawks can dominate the doves. Not only was Brainard the most ideologically extreme of the doves, but she was also their leader. With Brainard resigning prior to the March meeting, more voices for a higher hike will have a say.
The markets may not agree with me, but if job numbers and the next CPI report are too hot, watch those odds of a 50 basis point hike rise.