Will they or won’t they?
That is the question of the week.
The Federal Reserve meets today and tomorrow and has basically pinkie sworn and told the world they will raise interest rates for the first time since Abraham Lincoln was president—“cross my heart, hope to die, stick a needle in my eye.”
That’s not an exact quote from Fed Chair Jerome Powell, but it’s close enough.
Ah, but here we are, on the day the Fed’s March pow-wow begins. And life has suddenly become way more complicated for ‘Merica’s money-meisters.
On the one hand, there was that February inflation reading that emerged last week. Hoooo doggie—7.9% on an annualized basis…the highest reading in 40 years. (And if the U.S. government was still using its calculation method from 1990, before Uncle Sam’s inflation trackers began magically adjusting numbers to reduce reported inflation, the real rate is just over 16%—the highest level since 1947, according to ShadowStats, which tracks this data.)
On the other hand, there’s Russia’s invasion of Ukraine, which is having a huge impact on commodity prices because both combatants are giants in food crops and/or industrial commodities. Note that America’s February inflation data reflected prices before the war began, which means upcoming inflation readings are very likely to be substantially higher.
Both of those hands—inflation in one, war in the other—put the Fed in a pickle.
Play to the inflation worries in the U.S., and you’re raising rates into what’s likely to be a global recession sparked by an upcoming surge in food and commodity inflation.
Play to the recession worries by skipping the rate hike and you allow inflation to run even hotter here at home, which could spiral out of control, necessitating even more foul-tasting financial medicine down the road.
Damned if you do.
Damned if you don’t.
What’s the Fed to do?
There’s a strong possibility the Fed might just use this moment to delay the rate hike for a while. It can legitimately justify that decision by noting that the war has created a level of economic instability globally, and it doesn’t want to raise rates until there is a greater sense of geopolitical and trade normalcy.
There is some logic to that.
After all, raising interest rates in the U.S. won’t reduce costs that are impacted by a war involving two commodity giants.
And though a small rate hike of 0.25% seems relatively insignificant (and it is in light of nearly 8% annual inflation), financial markets are swayed by emotion and sentiment. There’s good reason to think that the sentiment would be, “Yo—like, what are you guys doing? Don’t you see the world is about to slip into a commodity-induced recession? And you want to raise rates into a recession?”
A 0.25% rate hike would probably see stocks and bonds sell off even harder…which the Fed probably doesn’t want to see because falling stock prices have a habit of tanking consumer sentiment, which tends to be a self-fulfilling prophecy in terms of slowing the economy.
If the Fed does, indeed, hold off, Wall Street would likely regain some lost ground. A bit of a relief rally, even if short-lived.
Then again, does the market begin to see the Fed as “the boy who cried wolf” and start disregarding the Fed’s word going forward?
The Fed can’t have that. It would sap the Fed’s ability to sway markets with just a few words rather than actions—and since at least the ’90s, if not longer, the Fed has regularly sought to goad the markets this way and that through its oral and written musings.
What comes of this particular meeting really is a hard call.
Logically, if I’m Poohbah Powell, I want to hold off at least a month to see what comes of this war and the impacts that sanctions will have on global commodities markets, and more importantly the domestic market that impacts U.S. consumers.
I’ve all but pinkie sworn that I will raise interest rates to fight inflation. If I don’t, then what?
I guess it comes down to this: reputation.
Not hard to see Powell & Co. decide that the Fed’s words need to mean something, even is extraneous events would seem to offer an out.
So, will they or won’t they?
I guess the answer is, “Yeah, they probably will.”
Unless then don’t.
We’ll know tomorrow.