Thread by @RickRieder

The @federalreserve’s Federal Open Market Committee raised the target range for the Federal Funds #policy rate by 0.75% yesterday, to between 1.50% and 1.75%, as was increasingly anticipated.

The move by the #Fed to progress faster to neutral will be applauded in the long run by the #economy, business decision-makers and ultimately by# markets.

Like putting your car’s transmission (automatic or manual) into #neutral, getting to that place allows for decision-making flexibility given changing road conditions, particularly when the road to the #destination has become increasingly #murky.

The fact is that the May #CPI report came in hotter than expected by many, and other #inflation data last week did little to provide relief to the view that strong price gains may be with us for a while.

Therefore, as reiterated by the Chair, it’s critical for the Committee to move policy #rates expeditiously toward and above estimates of neutral in order to quell high #inflation.

Not surprisingly, then, the Summary of #Economic Projections (SEP) displayed a fairly steep rise in the Committee participants’ estimates of policy rate levels from 2022 to 2024, even as estimates for real #GDP growth declined and estimates for the #unemployment rate increased.

The #Fed’s hope is to bring down high levels of #inflation, and prevent inflation expectations from rising too much, while not breaking the #economic recovery, but this increasingly appears to be a narrow path to tread.

Inflation has been driven dramatically higher by #supply conditions, such as the Russia/Ukraine war’s impact on #food and #energy costs and these types of inflation are much harder for the Fed to deal with.

Yet, as we say often, high #prices can be the cure for high prices and #inflation is clearly creating a tangible set of slowing consumption and #investment conditions, accompanied by market-driven interest rates dramatically slowing some areas of the economy, such as #housing.

In the coming months, we think it’s increasingly likely that we’re going to witness a growing “wedge” between the #corePCE measure of inflation and the #HeadlineCPI metric, which can’t be ignored.

One of the key reasons for this divergence will be the likely role of #volatile food and #fuel prices, which may keep headline inflation sticky on the high side, even as core #PCE moderates somewhat.

It seems fairly clear to us that if #inflation doesn’t broadly cool off in the next several months, it will be due to higher than anticipated food and #energy price increases.

Hence, yesterday’s action was very much needed and will ultimately be viewed as beneficial in its speed and for drawing #policy closer to #neutral, with a clear set of intentions to get there and at least a bit beyond.