With the Fed raising rates again today and at least one more 25 bps hike coming later this year, I am starting to ask whether or not the Fed is being too Hawkish. Given guidance, it looks like the FFR is going to go up at least another 50-75 bps by YE 2017.
Yes, inflation is up, but still quite manageable (2.5% - 3.0%). To me it seems like the strategy is raising rates simply for the sake of raising rates. Could be wrong and feel free to correct me. Worried that the yield curve is going to get too flat, not that it already isn't.
What say you?
I don't think that the fed is being too Hawkish. We knew Powell was Hawkish and that that would be the baseline to expect from him. Raising to 2.5% by Year end and then up to 3% through 2019 puts us at a neutral rate. I don't really think they're raising rate just for the sake of it, though I also don't think inflationary concerns are the main drivers.
They've stated their forecasts predict about 3.1% economic growth in 2019 followed by about 2.8% in 2020 and inflation has been sitting at just over 2% for a bit. Obviously this isn't driven by inflationary concerns looking at those numbers. Powell even said it himself that inflation is quite easy to control right now.
I personally believe that they realize that there could very well be another recession in the next year or two. If you look at what the FFR was just before the 2008 crisis we were at about 5.25%. If they kept rates steady at mid 2% I just don't think they'd have enough "bullets" in the chamber to fight the next recession. The last one required going from 5.25% to zero bound (which gave the fed a lot more runway for forward guidance / bulk rates reduction). FOMC will probably raise to a neutral 3% and then maybe start tapering the 25 bps increases to every other meeting.
Personally I'm not too big of a believer in the "Uh oh YC is flattening better watch out" mentality. It honestly is herd mentality. I'm not 100% on the numbers but I think you should start being partly concerned when the YC inverts. I think the statistic is that a recession on average followed 16 months after an inversion of the YC, and even then stocks continued to gain for up to 13? months post YC inversion.
I agree, I think they realise if a recession happens they literally have no tools to fight it.
Forget watching the FFR, look at their balance sheet. Now is the time to raise rates. Thankfully, we have a great tax cut that will put a floor on the market while rates are increased and the balance sheet slowly unwinds. When Canada breaks and eventually China, the market will pop some.
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