Federal Reserve Jawboning Tightens a Notch in August
Because people now expect it not to cut as rapidly as previous market expectations held, perhaps?
The Treasury 10-Year Inflation-Indexed bond rate says that there has been a 50-basis point move toward tightening in the market’s sense of the relevant intertemporal price structure. (It is the 10-Year that best matches factors important for guiding investments in construction and guiding the trade balance via exchange rates.) This is not the effect of monetary policy through the credibiliity channel. And this is not “animal spirits” as they affect corporate investment decisions—which animal spirits we see through a glass, darkly, in the stock market.
But it is not chopped liver either:
Since September 2022, the Federal Reserve has been validating market expectations about the slope of the intertemporal price system, and thus incentives to spend-vs.-save.
But over the past month, it has talked tough enough to shift the intertemporal price system up by as much as five 25 basis-point short-term interest-rate increases normally do.
Now, having talked tough, does the FOMC want to go and actually make any more interest rate increases? Or will it decide that the jawboning has been all the policy it needs, and that it has done its job by damping-down expectations that short-term interest rates will be cut anytime soon?
Sam Unsted: Policy caution: ‘Federal Reserve Bank of Atlanta President Raphael Bostic warned that policymakers need to be cautious to avoid overtightening monetary policy and risking doing any harm to the US labor market. Speaking at an event in South Africa, he said US monetary policy is “appropriately restrictive.” Bostic added: “I think we should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain”…
TIPS expectations of inflation over the next 5 years has fallen by 23 basis points since mid-July. To me this means that opinion among these people who are betting real money one way or the other, has shifted a bit more toward the Fed failing to achieve the soft landing and infect pushing us into recession and a period of under-target inflation. Of course, TIPS folks have no perfect crystal ball about what the Fed will do or the effects of what it will do will have.
I still hope that the Fed will not further increase rates and that a recession will not develop, but that is looking a little less likely.