Jerome Powell Strikes!
Today the Hon. Jerome H. Powell executed the high and solemn duty of his office…
Word came down at 2:00 that he is raising the Fed’s target rate another quarter-point.
The new target will ply the range between 1.5% and 1.75% — up 0.25% from its previous range.
The Dow Jones popped some 70 points on the news.
The news was expected, after all.
And markets enjoy having their expectations confirmed.
But now for the hour’s question:
Markets previously baked three rate hikes into this year’s layer cake.
Will Powell mix in a fourth?
The answer shortly.
As you’ll see, the answer has serious… implications for the market.
The market has priced in three hikes, but the question is whether Federal Reserve officials will signal a fourth… That could result in a jump in bond yields and a stock market sell-off… Diverging views in the markets may result in a volatile reaction, no matter what…
Perhaps you’ll recall that spiking bond yields at least partially triggered last month’s correction.
Yields on the 10-year Treasury closed to within spitting distance of 3% — the point many analysts believe could begin a stock sell-off.
If the Fed now indicates the likelihood of a fourth rate hike, might rising bond yields produce another panic?
They did before, after all.
So what did the Fed reveal about a fourth rate hike today?
Let us preface the answer by thumbing back the calendar to December…
The Fed forecast a workmanlike but undistinguished 2.5% growth rate for 2018.
But that was before Congress rammed through a $300 billion spending deal… and before the Trump tax cuts worked their way into the calculation.
For these reasons and more the economic winds shifted, Powell told Congress last month.
The “head winds” transitioned to “tail winds.”
Unemployment is licked, business is on the jump, fiscal policy is becoming “more stimulative.”
Meantime, tax cuts will add “meaningfully to growth.”
Powell even expressed concerns about an “overheating economy.”
A fourth rate hike this year might therefore be in the stars.
Prior to today’s announcement, markets estimated the odds of a fourth rate hike near 40%.
So what did the Fed reveal today about a fourth rate hike this year?
There won’t be one.
Only three rate hikes this year, it predicts.
The lack of a fourth rate hike is no surprise to our own Nomi Prins:
I do not believe there will be four hikes this year, because the Fed remains concerned about not popping various asset bubbles.
Even three are uncertain:
There may not even be three: The Fed fell short of its rate hike forecast in 2016 due to market volatility. Plus, inflation remains below 2% and the jobs reports indicate that wages are tempering, not increasing.
It appears to us that Mr. Powell has a tiger by the tail…
If he doesn’t raise rates the bubble will inflate further still — and what a bubble it is already.
But if he tightens too aggressively he courts a dramatic market sell-off… and the very recession he’s at pains to avoid.
Today’s reading suggests he’s attempting to straddle the dividing line.
But can he?
The Fed is still tightening.
There are not only the rate hikes.
There is also its current quantitative tightening to consider…
The Fed plans to hack over $1 trillion off its balance sheet over the next two years.
Jim Rickards estimates that every $500 billion of quantitative tightening could equal one 25-basis-point rate hike (see below for more).
We mention — en passant, of course — that 10 of 13 post-World War II tightening cycles have ended in recession.
And at 105 months, the current expansion goes on borrowed time.
By May it will become the second-longest expansion on record.
By next summer — if the gods still smile — it will become the longest.
Tread carefully, Mr. Powell… tread carefully…
Managing editor, The Daily Reckoning