Consensus is that the Fed will hike its Fed Funds rate by 25 BPS on Wednesday and then pause rate hikes as the Fed observes economic data for an undetermined period of time. The Fed ought to leave the door open for more rate hikes including a rate hike in June.

• Slow to Act: The Fed has been behind the curve since 2020. It overshot on QE (far too much for far too long) and subsequently has fought inflation with kid gloves. To back off of the inflation fight now would be to quit too soon.
• Money Supply Is More Important Than Fed Funds Rate: More important will be the pace of QT (the Fed’s balance sheet reductions), as shrinking the money supply will slow the economy.
• Silver Lining: One positive element to this ongoing banking crisis is that the banks are tightening credit and therefore shrinking the money supply.
• Leave the Door Open: Our bet is that the Fed will hike rates by 25 BPS on Wednesday and will leave the door open for more rate hikes. It would not make sense for Powell to box himself in by telegraphing an indefinite rate hike pause as the Fed’s next move – not while Core CPI remains far too high (chart below).

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