Dot Plot Dump
The Credit Strategist Blog
The following was greatly assisted by the work of my friend Peter Boockvar whose excellent newsletter The Boock Report (www.boockreport.com) is highly recommended to all of my readers.
As expected, the Fed raised the Federal Funds rate by another 75 basis points today to 3.0-3.25%, still leaving them well below the rate of inflation. More importantly, it raised its dot plot from 3.4% in June to 4.4% by year-end, implying another 125 basis points of hikes over the next two meetings (75 in November and 50 in December? Vice versa? Does it matter?). This is more tightening than the market expected. The median dot plot tacked on another 20 basis points in 2023 which would bring Fed Funds much higher than the consensus expected when this tightening cycle began early this year. The Fed also raised its unemployment estimate to 4.4% from 3.9% for 2023 and its core PCE projection from 2.7% from 3.1% (which is probably optimistic), which is down pretty sharply from its 2022 forecast of 4.5%. It also cut its 2022 GDP to almost zero at 0.2% from 1.7% and by 500 basis points to 1.2% in 2023.
The Fed appears to be on course to raise Fed Funds to ~4.5% rather than 4% and wait for the effects to work their way through the economy which increases the odds of both a hard landing and a financial accident. But Chairman Powell and his colleagues are feeling the pressure of failing to act sooner on inflation and are now willing to risk a recession rather than allowing inflation to become more deeply embedded in the economy. I believe that ship sailed long ago when they sat and watched asset prices inflate for more than a decade on the back of ZIRP/QE, so they are fighting a battle they can’t win without causing serious damage to markets and the economy (a price they’ve never shown they are willing to pay). For the moment, markets are confronting the “higher for much longer than expected” scenario they resisted for much of 2022 and are likely to mope around until they talk themselves into reasons to believe the Fed will not do what it appears very serious about doing. S&P 3500 is in the bag and the low 3000s look more likely than ever.
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