Ecoinometrics - Inflection point

The next phase of the rate hike cycle.

The closer we get to the expected recession, the less the Federal Reserve needs to do. The economists at the Fed know this and that’s why we are the inflection point of this rate hike cycle.

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Inflection point

Clearly the most important news of the week regarding the monetary policy of the United States is that Jerome Powell tested positive for COVID… Because speaking seriously it feels like the FOMC is running on autopilot at this point.

If you average the language trickling out of the Federal Reserve they are clearly working to signal we are at the inflection point of this rate hike cycle.

As we’ve said before the language is important, it is the third power of the Fed. Apart from controlling short term rates and playing with their balance sheet all they can do is talk about it. At least until we switch to a world of Central Bank Digital Currencies.

This is why reading the future in the Fed’s speakers speeches is such a popular art in macro. The good people at the Fed are certainly not always right about the trajectory of the economy. But at least they are making their positions clear even if they obviously do so with an agenda.

So we cannot simply ignore the inflection point in the language.

This inflection point can be summarised as follows:

• We are done with the fast pace of rate hikes.

• But we are maintaining rates higher.

If you remember your calculus classes from high school this inflection we are talking about is the inflection of the rate hike curve. Rates will increase, but at a slower pace until  they top off.

The language is actually compatible with the data.