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The Fed hikes again – The Daily Tearsheet


Vital Statistics:

  Last Change
S&P futures 3,803 3.25
Oil (WTI) 85.62 2.76
10 year government bond yield   3.64%
30 year fixed rate mortgage   6.28%

Stocks are flat after the Fed hiked rates yesterday. Bonds and MBS are down.

As expected, the Fed hiked interest rates by 75 basis points. The decision was not the focus however; the dot plot was the main attraction. The September versus June plots are below:

The median consensus in June was for the Fed Funds rate to end the year in a range of 3.25% – 3.5% and to end 2023 in a range of 3.5% – 3.75%. This was bumped up considerably yesterday. The voting members now see an end-of-year Fed Funds rate of 4.25%- 4.5% and a 2023 ending range of 4.75% – 5%.

The economic projections were tweaked as well – with 2022 GDP revised materially lower from 1.7% to 0.2%. Since GDP was negative in Q1 and Q2 that forecast seems optimistic. The unemployment forecast was revised upward as well, to 3.8% for 2022 and 4.4% for 2022 and 2023. They see inflation coming in at 5.4% this year and gradually getting back to their 2% target by 2025.

During the press conference, Jerome Powell stressed the Fed’s commitment to taming inflation and its willingness to support a period of below-trend growth. The Blue Check Marks squawked on Twitter about the Fed decision, and we can expect more of that as the economy slows and they fret about the political ramifications.

I don’t see how we get to positive 0.2% GDP growth this year given that Q1 and Q2 were negative, the Atlanta Fed’s GDP Now index is predicting only 0.3% growth for Q3 and we have about 225 basis points in Fed hikes that will begin to impact the economy in Q4. The NBER will probably still find a way to bird box its way into not calling a recession though.

The Fed Funds futures see another 125 basis points in hikes between November and December. The December 2023 Fed Funds futures see rates at the same level, so perhaps we are close to the end of this process.

The yield curve inverted even more after the announcement, with 2s / 10s dropping to negative 55 basis points at one point. This morning, 2s / 10s are at negative 47 basis points.

The economy is looking to weaken, according to the Conference Board’s Index of Leading Economic Indicators. The index fell 0.3% in August after falling 0.5% in July. It has been falling for the last six months.

“The US LEI declined for a sixth consecutive month potentially signaling a recession,” Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “Among the index’s components, only initial unemployment claims and the yield spread contributed positively over the last six months—and the contribution of the yield spread has narrowed recently.”

“Furthermore, labor market strength is expected to continue moderating in the months ahead. Indeed, the average workweek in manufacturing contracted in four of the last six months—a notable sign, as firms reduce hours before reducing their workforce. Economic activity will continue slowing more broadly throughout the US economy and is likely to contract. A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures. The Conference Board projects a recession in the coming quarters.”

The red lines indicate a recessionary signal, and it is flashing red right now.





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