The Fed Is Not Done Yet. Another Rate Hike May Well Be on The Way.

We all know the “Fed pivot narrative” by heart at this point. The narrative is that the Fed has raised interest rates enough already, inflation is coming down on its own with no further help from the Fed, and the Fed should go on “pause” in terms of further rate hikes.

Once the pause is in place, the Fed should move quickly to rate cuts. This will happen either because the economy is on an even keel (the Goldilocks scenario) or the economy is slowing, but it’s not too late to help with rate cuts (the soft-landing scenario).

There’s only one problem with the Fed pivot narrative. We’ve been hearing it since the summer of 2022, and it has been wrong the entire time.

Despite the narrative, the Fed continued to raise rates in September, November and December of 2022, and February, March and May of 2023. There’s no pause or pivot in sight, according to repeated Fed statements.

Of course, the Wall Street analysts and TV talking heads like the pivot narrative because it’s a reason to buy stocks. But, it’s pure invention and has been all along. The next Fed meeting is on June 14.

Right on cue, Wall Street has declared that the Fed is now done with rate hikes, the pause is in place, and the pivot is coming soon. But that’s not the case at all, according to this article.

John Williams, President of the Federal Reserve Bank of New York (which runs the Fed system open market operations) and a permanent member of the Federal Open Market Committee (FOMC, which actually makes rate decisions inside the Fed), says, “We haven’t said we’re done raising rates.” He also said, “I do not see in my baseline forecast any reason to cut interest rates this year.”

So much for the pause and the pivot.

To be clear, Williams is just one vote on the FOMC, and Chair Jay Powell may have other ideas. The best analysis is that the Fed has not made up its mind about what to do on June 14. Much will depend on the May employment report, which won’t be available until June 2, and several inflation reports (CPI, PPI, PCE) that will emerge at various times between now and June 14.

Still, inflation is 4.9%, which is well above the Fed’s goal of 2%. This will be a long, slow battle. We’ll know what the Fed will do on June 14 closer to the date. For now, rate hikes are still on the table.

The pause and pivot crowd may have to wait a bit longer before they get what they want. And by then, the economy may be in a recession which blows up their Goldilocks scenario. The old saying, “Don’t fight the Fed,” is truer than ever.

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