The Fed wants to get back to 'normal'
The Fed is probably going to hike in September but Fedwatcher Tim Duy argues that they're making a big mistake and he makes a convincing case about why.
"The Fed believes that the economy will evolve in such a way that it can raise short-term rates back to levels comparable to the old normal," he writes. "This is a recipe for recession."
As Matthew Boesler points out, BNP Paribas went from a June liftoff call to September to December and now says "risks tilted toward US policy normalization somewhat later."
Everyone agrees on three things:
- US employment is relatively healthy
- Growth is mediocre
- Inflation is low and there are no signs of a pickup
Almost everyone agrees that with inflation low and commodities falling, there is no 'need' to raise rates. Yet the Fed faces this conundrum of 'wanting' to raise rates because 0% is an emergency level.
US 10-year breakevens show extremely low inflation expectations
So it's not really a question of what the data says over the next month. It's really about how long the Fed can tolerate being at zero.
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