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In this article:
Key Takeaways from this week’s speeches and interviews from the Fed Governor’s and Treas. Sec. Yellen
Charts
Short term real rates are negative as the short term rate is lower than expected inflation which makes current monetary policy still accommodative. So positive real rates means the short term rate is higher than expected inflation, which will make monetary policy restrictive. Estimate is 0.5%, or 50 bps, the policy rate needs to be at above inflation in order to be restrictive.
8/29 Fed Vice Chair Brainard comments in in remarks to FedNow workshop
Launch of Fed Now payment service likely May-July 2023
8/30 Richmond Fed Barkin speaks at event
Recession is risk in getting inflation under control
Seeing some slowing in interest-rate sensitive sectors
Fed will do what it takes to return inflation to 2%
will need positive real rates to control inflation
interest rates will need to be restrictive
8/30 Atlanta Fed’s Bostic comments in essay on banks website
Could dial back 75 bps hikes if prices clearly cooling
policy needs to be restrictive
8/30 NY Fed’s Williams at WSJ event
Focused on getting inflation back down to 2%
Restrict Fed policy needed through next year
Feds needs somewhat restrictive policy, not there yet
Decision on Sept. rate move hinges on data totality
8/30 Richmond Fed Barkin on Yahoo Finance
Won’t prejudge size of next rate hike, depends on data
Must move real rates to positive territory across curve
focused on getting rates to restrictive territory
There is a lag in impact from monetary policy
Inflation coming down through three ways 1) falling demand 2) healing supply chain challenges 3) commodities falling
8/31 Cleveland Fed Mester at Dayton Chamber of Commerce
Sees unemployment above 4% by year end
Does not anticipate Fed cutting rates next year
Hikes lead to below trend growth in nominal output for this year and next and higher unemployment rate
Can’t be precise yet on Fed’s terminal interest rate
Have to curb inflation even if that means a recession
Wage increases not keeping up with inflation and current wages are not consistent with our 2% goal
need wage growth to moderate to 3.25-3.5% for price stability
expects more progress with inflation moving down over the next two years but will require further action by the Fed to make that so
Will calibrate hikes based on economic outlook and monetary policy goals
Real rates need to move in positive territory and remain there for some time
Need several months in MoM declines in inflation to confirm inflation has peaked
8/31 Treasury Secretary Yellen
Substantial progress made on G-7 Russia Oil-Price Cap
Without a price cap, we face the threat of a global energy price spike if the majority of Russian energy production gets shut in
JP Morgan estimated oil at $380 in worst case scenario if Russia cut 5 mbd. $190 if Russia cut 3 mbd.
9/1 Atlanta Fed’s Bostic speaks to Business School students
Fed may have to sell MBS from balance sheet in future
Balance sheet to be increasingly MBS concentrated
Fed has got to get the economy to slow down
That is it for the week!
H=Hawk D=Dove
Payroll data moves Treasury market most
Sell 2Y/Buy 10Y flattens until hikes stop
Next week
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Charts, news, and/or data sourced from Bloomberg Professional unless otherwise noted.
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