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Markets fought back to around breakeven by the close — exactly 0.00%, in the case of the small-cap Russell 2000 — after spending much of the day in the red in the wake of the second day of testimony on Capitol Hill by Fed Chair Jay Powell. The leader of the Federal Open Market Committee re-set expectations on the dot-plot for future rate hikes, though not specifically. The Fed funds rate currently runs between 4.50-4.75%.
Thus, whether the Fed moves 25 or 50 basis points (bps) higher two weeks from today, it will be the highest level interest rates have been to since September 2007 — a year before the financial crisis which led to the global Great Recession. Two more 50 bps hikes would bring us to 5.75% on the high end of the range, for the first time since January of 2001. And the way things have been going, it’s a short step to 6% from there.
Although we have seen hotter-than-expected economic prints over the past month or so, including this morning’s ADP (ADP - Free Report) private-sector jobs totals of 242K (topping estimates by more than 30K), pushing interest rates from 0.00-0.25% in March of last year up 550 bps by this summer would be almost unprecedentedly steep — going back to that nightmare scenario in late 1980 when rates flew from an already high 9% in July to 19% by January of ’81.
So even though we’ve been through 6% interest rates before, it hasn’t been part of the narrative in the U.S. economy this century. And when we were there, those of us who are old enough to remember still understand what a slog it was. On the other hand, what’s the Fed to do if we continue to see things like half a million new nonfarm payroll jobs per month (February’s report is due Friday before the bell), or +14% pay increases for workers switching jobs (like we saw in today’s ADP) or 10.8 million job openings (as shown in today’s JOLTS report)? These are all conduits for higher inflation.
Stabilizing inflation and achieving full employment are the two parts of the Fed’s dual mandate. These are their only charges, and with unemployment rates lower than they have been since May 1969, it’s fair to say they’ve accomplished half of this mandate. The question for the Fed is whether they want to keep moving as they have — trimming hikes from a fourth-straight 75 bps in November of last year to 25 bps last month, in hopes economic realities will catch up with the rate increases — or turn up the heat to boil these stubborn inflation metrics out of the economy sooner.
Image: Bigstock
Are We Racing Toward a 6% Fed Funds Rate?
Markets fought back to around breakeven by the close — exactly 0.00%, in the case of the small-cap Russell 2000 — after spending much of the day in the red in the wake of the second day of testimony on Capitol Hill by Fed Chair Jay Powell. The leader of the Federal Open Market Committee re-set expectations on the dot-plot for future rate hikes, though not specifically. The Fed funds rate currently runs between 4.50-4.75%.
Thus, whether the Fed moves 25 or 50 basis points (bps) higher two weeks from today, it will be the highest level interest rates have been to since September 2007 — a year before the financial crisis which led to the global Great Recession. Two more 50 bps hikes would bring us to 5.75% on the high end of the range, for the first time since January of 2001. And the way things have been going, it’s a short step to 6% from there.
Although we have seen hotter-than-expected economic prints over the past month or so, including this morning’s ADP (ADP - Free Report) private-sector jobs totals of 242K (topping estimates by more than 30K), pushing interest rates from 0.00-0.25% in March of last year up 550 bps by this summer would be almost unprecedentedly steep — going back to that nightmare scenario in late 1980 when rates flew from an already high 9% in July to 19% by January of ’81.
So even though we’ve been through 6% interest rates before, it hasn’t been part of the narrative in the U.S. economy this century. And when we were there, those of us who are old enough to remember still understand what a slog it was. On the other hand, what’s the Fed to do if we continue to see things like half a million new nonfarm payroll jobs per month (February’s report is due Friday before the bell), or +14% pay increases for workers switching jobs (like we saw in today’s ADP) or 10.8 million job openings (as shown in today’s JOLTS report)? These are all conduits for higher inflation.
Stabilizing inflation and achieving full employment are the two parts of the Fed’s dual mandate. These are their only charges, and with unemployment rates lower than they have been since May 1969, it’s fair to say they’ve accomplished half of this mandate. The question for the Fed is whether they want to keep moving as they have — trimming hikes from a fourth-straight 75 bps in November of last year to 25 bps last month, in hopes economic realities will catch up with the rate increases — or turn up the heat to boil these stubborn inflation metrics out of the economy sooner.
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