Despite Jerome Powell’s assertion just last month that the Federal Reserve was not “actively considering” raising the federal funds rate by 75 basis points, markets have priced in over the last week a staggering 90% chance of the Fed in fact raising our historically low interest rates by three-quarters of a percentage point.
Perhaps this is Powell finally panicking in response to the disastrous Bureau of Labor Statistics report finding that, contrary to the claims of the Biden administration, the highest inflation in 40 years has not remotely peaked. But the truth behind the famously craven Fed’s about-face may prove a little more nefarious.
On Monday, just two days before the third Federal Open Market Committee meeting of the year, the Wall Street Journal’s chief economics correspondent Nick Timiraos teased that the Fed was indeed embracing its first 75-point hike since the Greenspan era, a 180 from the central bank’s supposed commitment to coordinated half-percentage-point hikes.
“Fed officials have said they would want to respond aggressively to signs that inflation expectations were rising, or becoming ‘de-anchored,’ because they believe the process of wringing inflation from the economy will become far more difficult if that has happened,” Timiraos reported, noting that the Fed would “likely” consider a 75-point hike. Markets immediately tanked upon the news. The S&P 500 dipped further into bear market territory on Tuesday, with stock futures only slightly rising in anticipation of Wednesday’s opening bell.
A cynic would say that prediction from the Wall Street Journal, a favorite of the Fed and markets, was a report directly from the source and that someone from inside the central bank wanted either to prepare investors for a stark rate hike or, worse, position markets for an artificial rally upon subverting its expectations with a mere 50-point hike.
Make no mistake. Any rally from the committee’s announcement is no more than the dopamine rush an addict on the cusp of delirium tremens gets from an extra dose of backup booze. Wall Street has spent the last decade getting high off of the Fed’s artificially inflated supply of dirt-cheap liquidity, and any perceived deceleration or stabilization of the rate of money supply growth is just delaying the inevitable.
Either the Fed goes ahead with the 75-point hike and the markets have already priced it in or it pantomimes a backtrack to 50 basis points, and Wall Street throws a puny party for a news cycle. In any case, it’s all financial theater, a method for the Fed to pretend it takes seriously its role in lighting the integrity of the U.S. dollar on fire.