We believe the Fed will continue to raise rates into next year regardless of where the CPI comes in over the next several months.
Today the market is trading up as the headline CPI print came in lower than consensus estimates.
We believe the market is missing the bigger picture.
This CPI / Fed Funds Rate game is not a question of whether the Fed will raise by 50 or 75 basis points in September’s FOMC meeting (it looks like the former).
Similarly, this game is not about how high the Fed will raise rates (the Fed can’t afford to take rates to where they need to be given that there is more than $30 Trillion of public debt outstanding and counting).
Rather, this game is about how long the Fed will persist in raising rates before pivoting to lower rates and potentially lower rates combined with QE. Our view is the Fed will not pivot in the Fall or at year-end as many in the market believe. Fed Chair Powell does not want to be the second coming of Arthur Burns, the former Fed Chair who famously pulled back rates prematurely only to have price inflation accelerate in his face. Read more about Arthur Burns HERE.