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Economic Commentary

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On February 23, 2023, Stifel’s Chief Economist, Lindsey Piegza, Ph.D., published Economic Daily, excerpts from such publication are included below.

Yesterday, the FOMC meeting minutes affirmed Federal Reserve Chairman Jerome Powell’s broader message presented during the press conference earlier this month: Given the still elevated nature of inflation and the solid level of activity in the economy, more rate hikes are not only appropriate, but also necessary to reinstate price stability. That being said, while the topline thesis was as expected, there were also some notable, perhaps less anticipated points, worth mentioning:

  1. Most but certainly not all Committee members favored a slower pace of ascent at the February meeting. Of course, there were no descents, thus those in favor of a larger 50bp increase either were nonvoters or opted to shelf their opposition for the record.

  2. Policy makers are increasingly concerned regarding the shenanigans in Washington over the debt limit, potentially resulting in unnecessary uncertainty, which could disrupt both markets and the broader economy. “Participants noted that sources of such risks included the prospect of unexpected negative shocks tipping the economy into a recession in an environment of subdued growth, the effects of synchronous policy firming by major central banks, and disruptions in the financial system and broader economy associated with concerns that the statutory debt limit might not be raised in a timely manner,” the minutes stated.

  3. Participants highlighted the slower levels of growth overseas which could help assist in reducing global inflation, however, officials also specifically noted a rollback of COVID safety policies in China which would expectedly result in stronger growth – eventually –potentially fueling price pressures.

  4. While acknowledging the potential for a lagged effect of earlier policy initiatives, members noted a level of concern in reaching a sufficiently restrictive level of policy: “A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures, leading inflation to remain above the Committee’s 2 percent objective for a longer period, and pose a risk of inflation expectations becoming unanchored.”

Bottom Line: The Fed remains committed to raising rates further in order to tame inflation. The latest slew of stronger-than-expected data, however, suggests that threshold may be higher than previously expected. Furthermore, given the recent uptick in strength, there are at least some at the Fed that suggest the pace of ascent should (re) accelerate as a result.

According to Bloomberg data, not only is the market coming to grips with the notion of “higher for longer” with 1) expectations of a terminal rate now at 5.36%, up from 4.53% at the start of Q4, and 2) the 10-year rallying – as we’ve long predicted – nearer 4%, but 3) market participants are now increasingly considering a larger 50bp hike next month at 27% probability. While still minimal, even acknowledging the prospect of a larger hike is a notable change in sentiment in such a short period of time.