Possibility of a Powell Pause? – Halyard’s Weekly Wrap – 12/16/22

As expected, the Federal Reserve and the European Central Bank both raised overnight interest rates this week, and both delivered a hawkish prepared statement but softened the language in the post-conference press conference.  At the press conference Powell said that rate-hike speed is no longer the most important question, now that the top of the Fed Funds target range is 4.5%.  We interpret that as meaning that the days of 75-basis point hikes are behind us and that the possibility of a pause at the February meeting is now possible.  Christine Lagarde also communicated that another 75-basis point hike is unlikely, but with the ECB overnight rate sitting at 2.5%, she is not likely to garner the same inflation-fighting stature as Powell.

Under normal circumstances, we’d be listening in the coming days for opinions from the other members of the committee, but with the calendar of speaking engagements blank through year-end, we won’t hear from them until the new year.

Judging by the November Consumer Price Index, the Fed’s harsh medicine of higher interest rates is starting to work.  While year-over-year CPI still rose 7.1% last month, it’s down from 7.7% in October, and the 0.1% month-over-month increase is exactly what the Fed has been expecting.  While the November Producer Price index came in higher than expected, that measure of inflation takes a back seat to CPI in that some of those price pressures can be absorbed by margin compression at the corporate level.  The CPI, on the other hand, directly impacts consumers and risks the spiral effect in which consumers expect prices to continue to rise into the foreseeable future.

The reaction has been a swift and steady drop in interest rates across the curve, with the 2-year note falling from the November high of 4.72% to close out the week just above 4.20%.  Similarly, the Fed Funds future contact is now speculating that the overnight rate will peak at 4.85% next May.

While there are only nine trading sessions left in this year, trading is far from over.  Next week housing, inflation, and consumer confidence data will be released and all three have the potential to move markets.

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