Fed: 50 bps in March?

Macro Perspectives: Wed 19 Jan 22

Back in December, we talked about the potential for the Fed to start moving on rates by March.

Just 30 days later, and the market has gone from a 30% chance to about 90% chance we will see liftoff...in March.

Also back in December, we looked at past tightening cycles, and we talked about the prospects of the Fed moving in 50 basis point increments, instead of 25 basis points, as markets are expecting. After all, with the latest inflation reading of 7% and the Fed Funds at near zero, the Fed is way, way behind. The longer that gap persists, the more the inflation situation is left to intensify.

Again, if we look back at the past five tightening cycles by the Fed ('87, '94, '99, '04 and '15), the Fed has averaged about 50 bps a quarter.

With the above in mind, over the weekend, billionaire investor Bill Ackman said this...

Add to this, the Wall Street Journal ran a piece yesterday afternoon quoting a former "top Fed staffer" as saying that the Fed needs to start preparing markets for the possibility of a 50 basis point March hike.

Just like that, the rate outlook is looking quite different and the events of the week ahead should only exacerbate it;

• First, we've talked about the impact of rising oil prices on inflation. Though the Fed likes to pretend it doesn't get too worried about "volatile oil prices," history suggests they do worry, and they tend to act when oil prices are making big adjustments (up or down). Oil broke out to $86 today - that's a 7-year high and up 62% over the past twelve months. The Fed should be worried.

  

• Secondly, we get Q4 earnings from 35 S&P companies this week. As we discussed in my Monday note, we should expect a lot of chatter about labour costs. Already, to kick off the week, Goldman Sachs took a chunk of money that could have (should have) gone to shareholders, and disbursed it to partners and employees ("wage pressure"). The Fed should be worried.

This all raises the spectre of inflation pressures, and therefore underpins the prospects for a more aggressive rate outlook. In the short term, that is driving the continued unwind of positions in high growth, high multiple stocks.

Still, unlike the taper tantrum of 2013, where stocks sold off on a Fed that was prematurely removing emergency policies in a slow-growth/low inflation/fragile economic recovery, in this environment the bigger risk to stocks is a Fed that is moving too slowly to remove emergency policies.

A more aggressive Fed should be a welcome force for market and economic stability.