We Don’t Have To Guess At Fed Policy. They Just Told Us.

I’ve frequently said that forecasting Fed policy is easy. The Fed actually tells you what they plan to do in advance. All you have to do is listen to what they say and believe them.

This is the “no drama” Fed. They don’t want to surprise markets or trigger any unexpected volatility. So, they signal in advance and move accordingly.

There’s a bit more to it than that. The Fed signals through leaks to chosen reporters. You need to know which reporters are the chosen ones and what publications they write for.

The Fed also rotates to new reporters from time to time so you have to be alert to any shifts. Still, it’s easy to know what’s coming. The hard part is knowing when the Fed is on the wrong course (they usually are) and when they will realize it (usually too late).

Based on that, you can forecast how much harm the Fed will do and how badly the economy will be damaged before the Fed changes course. So, Fed forecasting has two facets.

The first is knowing what the Fed thinks they’re going to do. That’s easy. The second is knowing what the Fed will end up doing after they blunder. That’s more difficult and the timing can be tricky, but that’s the real art of Fed forecasting. This article is a good example.

Based on the reporting, the Fed has announced two policies: The first is that they will raise interest rates 0.50% on December 14, just a few days away. The second is that they may continue raising rates for much longer than the market expects. This means we should expect at least two more rate hikes.

My estimate is a 0.50% rate hike on February 1, 2023 and a 0.25% rate hike on March 22, 2023. Those are the dates of the next two FOMC meetings at the Fed.

There’s another meeting on May 3, 2023. It’s too soon to form a good estimate of what the Fed will do in May, but Fed Chair Jay Powell has not ruled out another rate hike then.

Powell keeps taking a hawkish stance. He has done this in a series of four high-profile speeches (August 26, September 21, November 2, and November 30) and now press leaks.

Powell will have further public comments following the FOMC meeting on December 14. The market keeps trying to rally on the Fed pivot narrative of lower rates and Powell keeps trying to steer markets away from that narrative with his speeches.

Powell will win that debate, but that’s not a good thing. Powell will win in the sense of raising rates longer than markets expect. But the economy will lose by suffering a severe recession due to the rate hikes.

The Fed wants no drama in its rate hike policy disclosures, but it may have high drama when the economy crashes. That’s coming soon.

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