Keeping at it Until the Job is Done
Well, The Fed didn’t go the full 100 basis points, but put a cigar in Jay Powell’s mouth and you had Paul Volcker’s little brother up on the podium at today’s Federal Open Market Committee (FOMC) press conference. The Fed raised the Fed Fund’s target rate 75 basis points to 3.25% today, their third consecutive “jumbo hike”. However, the most important bit of data the Fed released with their statement (The statement always comes out at 2pm and then the Chairman’s press conference starts at 2:30pm) was the infamous “Dot Plot” (DP). The DP depicts what all 19 members (12 Federal Reserve Bank Presidents and 7 Federal Reserve Board Governors) predict the median Fed Funds rate will be for the future. I’ve put this meeting’s DP below.
The bright yellow dots show where each FOMC member predicts the average Funds rate for the rest of 2022 and then all of 2023, 2024 and 2025. The green line is the median Funds rate as predicted by all the members. For 2023 that came in at 4.6%. If you look at that white line and the purple line, that shows where the market THOUGHT the median would be prior to the meeting, about 50 basis points below, which is a huge difference for this type of thing. That shocked the markets immediately as short term rates blasted higher, stocks plunged and the U.S. Dollar pulverized every other currency on the planet…..and this was BEFORE the Chairman’s press conference.
The press conference was short, to the point and filled with fire and brimstone. Powell repeatedly summoned Volcker, stating, “We are going to keep at it till the job is done.” at least 5 times.
Powell also answered whiney, “When will you be done?” questions from the financial press with statements like, “The current rate (3.25%) is the lowest level of what is restrictive.” and, “There isn’t a painless way to get inflation behind us.” I was hoping he would just say, “I’ll be done when I’m done.”
All in all, after going through 2021 and half of 2022 botching the message, Powell is now very clear that the Fed’s main mission is price stability and he is going to slow the economy and raise unemployment to make it happen. Personally, the only place where the Fed is still in fantasy land is how much pain they are going to inflict. The Fed lowered their 2023 GDP growth projections from 1.7% (Their June projection) to 1.2%. The also think that the Unemployment Rate will top out at 4.4% in 2023.
I challenge that.
The American economy, specifically private business is carrying huge debt loads, much of it foisted on them by the Leverage Buyout free-for-all that has been going on since the Fed sent rates to near zero and kept them there for over a decade. The debt is mostly tied to short-term interest rates, like the ones the Fed just raised today…..by a lot….again….and will raise a lot more….again and again. For these companies, their debt service costs are sky rocketing, most of their input costs (like labor) are skyrocketing and demand for many of their products is declining as the economy slows. You don’t have to be a rocket scientist to figure out what’s going to happen.
Additionally, with the supply chain mess that we’ve had many manufacturing concerns have had to hold much more raw material inventory than they did pre-Covid. That inventory needs to be financed, also by rates tied to the rate the Fed keeps raising. Many manufacturers, big and small have partially finished items stored somewhere (at a cost) waiting for whatever part they need to complete them. Ford Motor recently reported they expect to have between 40,000 and 50,000 partially finished cars sitting around by year end. All that needs to be financed at increasing rates. Not good.
We are going to have a recession in 2023 and I don’t think it will be mild.