The Fed’s FOMC meeting will take place this week on June 14th and 15th. Fed Chair Powell has lost control of the inflation narrative. The Fed needs to act boldly to capture control of the inflation narrative.
Price inflation was obviously never going to be transitory given the Fed grew the money supply as measured by M1 from $4.0 trillion in February 2020 to a peak of $20.7 trillion in March 2022. In addition, to believe that price inflation peaked with May’s 8.6% CPI print would be a mistake.
Therefore, would Powell consider raising the Fed Funds Rate by 75 or 100 basis points this week? This would be above the 50 basis points the Fed has telegraphed. We believe there is a 50% probability that the Fed moves by 75 basis points this week and a 25% probability that the Fed tightens by 100 basis points. The Fed typically uses the 2 year Treasury yield as a policy barometer and that yield has moved from 0.78% at the beginning of 2022 to 3.06% as of Friday’s close. The Fed will continue to lose credibility if it does not act boldly.