Wednesday's Market Minute: Why Not 100?

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Federal Reserve Chair Jerome Powell should rip the Band-Aid off and hike the interest rate by 100 basis points at the next FOMC meeting in May. Or, do a 50bps emergency move between now and then.

Fed officials are already warming us up for 50 in May, and it looks like that's what the market thinks too. But if we need 50 instead of 25, how do we know we don’t need 100 instead of 50?

If the Fed truly believes rate hikes work to counteract our current supply-side inflationary problem, would it not make sense to deliver an appropriately powerful counteracting force based on how bad those problems currently are? Or are the hikes even an appropriate solution to current inflation dynamics at all?

The primary mechanism by which they tame inflation is by lessening demand, but right now there's a very real possibility that the bond market – vis-à-vis persistent yield curve inversion – is telling us any tweaks to demand could cause recession, or at very least, cause the Fed to have to cut rates in the future. Is the point to hike rates now, so that we can cut them later? If so, then it makes sense to get the rate as high as possible when it is the most justifiable based on inflation data, which may clear 10% in next month’s print. 

Right now, the market is preparing for 50 basis points in the next meeting and persistent hikes for the rest of the year. Why does a prolonged, steady pressure on the economy make more sense than a swift, powerful move commensurate with the current momentum of inflation? Does anyone really think they can predict what the post-COVID world is going to look like in eight months (assuming it’s a post-COVID world; China is in its worst state with COVID since the pandemic began).

It seems to me that moving slowly for a long period of time runs the risk of running into unforeseen problems later and simultaneously not solving the one in front of us right now: a fast, shock-style of inflation that is hard to predict more than a few months out.

The most obvious reason why the Fed wouldn't do 100 bps is because it would shock financial markets. Should we be so certain? The Nasdaq is up 17% since this month’s hike. Either the market is just fine with rate hikes, or perhaps the market is screaming to anyone who listens that there is a truly immeasurable amount of liquidity still running through the system that is commingled with the same forces of demand that are straining our broken supply chain. If so, then even more reason to deliver shock and awe. Powell’s already warned traders his priority is employment over the stock market, and we just got the best jobless claims report in 50 years.

If Powell really believes the employment situation is strong enough to withstand tightening, and that rate-hikes are indeed an appropriate solution to today’s inflation, why not push his pedal to the floor now – when inflation is at its most destructive – instead of assuming he’ll be able to do it later?

Image sourced from Flickr

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.