Thread by @RickRieder

The @federalreserve’s #FOMC has now moved in 75 basis point increments four times this year to get to a sought-after #policy destination very quickly.

Yet, the destination seems to have moved further away with each subsequent elevated #inflation print, and with #employment in the country remaining very tight.

Hence, while moving the #FederalFunds rate at a very fast 75 bps increment seemed almost inconceivable several months ago, especially as the #Fed was still undertaking quantitative easing (#QE) in March, we have become used to this extraordinary increment.

That’s because the #Fed needed to get interest rates (and #liquidity) from levels that were very accommodative (overly so) to a place that is finally approaching restrictive, over the span of a few months.

The persistent stickiness of elevated levels of #inflation has forced the #Fed to make “75 bps speed” a necessary path toward its primary goal of reducing inflation, but moving at a 75-bps clip now seems to be a question given how far the #Fed has already moved at this point.

Before today, markets had taken some relief from early indications that the #Fed may downshift its rate hike increment, while a clear movement toward the central bank’s ultimate target was still on the docket.

Some have called this evolution in policy a “#pivot” and have become overly optimistic about what it implies for #markets…

…but we learned today that the #Fed isn’t finished moving rates higher, if the Committee believes it’s required, based on the data.

However, we think that once the Fed achieves an adequately restrictive target policy rate, it is likely to pause at that level for a long time, as it observes the influence policy will have on the #economy and rates of #inflation over time.

Yet, we do think the beating that the #markets have experienced this year may now be executed with a lower level of intensity than before…

…as the #Fed approaches a clearly restrictive interest rate for the economy (while still draining #liquidity by reducing the size of its balance sheet).

That’s partly because we’ve been experiencing a dynamic in #markets whereby each data point associated with potential policy movement (#payrolls, #CPI releases and, of course, FOMC meetings) have added an ‘event premia’ to already fairly volatile markets.

When the #Fed makes the transition we have described, and as #inflation eases back toward more normal levels, this added market #volatility should abate.

Still, #markets should consider this #Fed as very serious, and willing to move more aggressively, if need be, over the coming months.

Our sense, though, is that the momentum of #inflation, and #hiring, will moderate lower from here, and consequently so will the Fed’s pace of policy #tightening, but the Fed clearly has to see that data first.