“The recession isn’t going to happen tomorrow, but it will happen next year.”
As we all expected, the Federal Reserve raised its key short-term interest rate by 50 basis points on Wednesday, while also announcing plans to begin paring back its balance sheet in June. And then .. the stock market roared about 3% higher on the news. Federal Reserve Chairman Jerome Powell triggered the surge with these words at his afternoon press conference:
So a 75-basis-point increase is not something the committee is actively considering. … there’s a broad sense on the committee that additional 50-basis increases should be on—50-basis-point increases should be on the table for the next couple of meetings.
It was a brilliant move by the Fed, in my opinion. Brilliant in the sense of setting up expectations in recent weeks — a 75 basis point increases was “possible” — and then knocking down that idea, making multiple increases of 50 basis points seem appealing. The stock market, which has been slumping for weeks, celebrated with a one-day party.
That’s how I saw it. Now let’s hear from Michael Ashton, an inflation guru who explains his thoughts just about weekly in his “Cents and Sensibility” podcast. In this episode, titled “Reflections on this Century’s First 50bp Rate Hike,” Ashton points out that the Fed did what was expected, and there is no danger in doing what is expected.
But he also warns about complacency on the U.S. economy, which could be heading toward a difficult stretch, even with inflation continuing in a 4% to 5% range next year:
I can’t think of any examples in history where you had a large increase in energy prices, not to mention food prices, and large increases in interest rates … and didn’t have a recession. That would be very odd. … The recession isn’t going to happen tomorrow, but it will happen next year.
And this forecast raises the “big” question: Will the Fed have the nerve to continue fighting inflation even when stocks fall into a bear market and the economy is suffering? Ashton contends that the “Fed put” — its resolve to protect the stock market — remains alive, even it it is in hiding.
Here is his podcast intro:
Today the Federal Reserve raised the overnight Fed Funds rate 50bps – the largest such increase since May 2000 (and the Inflation Guy is sticking by the title of this episode since technically the 20th century didn’t end until 12/31/2000!), and Chairman Powell strode confidently to the microphone in the post-meeting presser. How does this action, and what Powell said, impact the inflation outlook and why did the markets behave the way they did? (The answers are: not much, and for unhealthy reasons, but listen to the podcast anyway.)
Who is Michael Ashton?
His audiences know him as the “Inflation Guy.” He is a pioneer in the U.S. inflation derivatives market. Before founding his company, Enduring Investments, Ashton worked in research, sales and trading for several large investment banks including Bankers Trust, Barclays Capital, and J.P. Morgan.
Since 2003, when he traded the first interbank U.S. CPI swaps, and 2004 when he was the lead market maker for the CME’s CPI Futures contract, he has played an integral role in developing new instruments and methods for accessing and hedging various inflation exposures. In 2016, Mr. Ashton published What’s Wrong With Money? The Biggest Bubble of All. He is a graduate of Trinity University and lives in Morristown, New Jersey.
Have a question? Get the Inflation Guy app in the Apple App Store or Google Play, or email InflationGuy@enduringinvestments.com.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.