Global conflict of financial conditions

Fed and financial indicators… The necessity of tightening financial conditions in order to help the Fed to restore price stability is decisive, as it is also a dominant issue in the market. FOMC members appear to be highlighting signals that the committee will be more aggressive in tackling inflation. In this market environment, it is important what kind of guidance Powell’s views will contain as Fed members begin to take more hawkish direction. The basic fact is: The upward pressure of inflation on the demand axis may force the Fed to apply 75 bps shocks more. At the moment, the base scenario is that the Fed will go with 50 basis points increases in the next three meetings.

Consumer inflation rigidity… Consumer price inflation may already have peaked, but the decline will not come easily from here. Demand supports the economic outlook on the one hand, but also lends ground to inflation rigidity. Income and savings levels of households and businesses also support the solid spending momentum at the moment, but the detail that puts the business in trouble in terms of inflation is the expectation that prices will continue to rise: The expectation that prices will continue to rise puts discretionary expenditures as well as consumer expenditures and creates an artificial demand effect. In other words, buying today is always more profitable than buying tomorrow. This is a situation that will contribute to inflation rigidity. Shocking demand is an option, of course, to prevent this, but this drug will also stagnate the economy.

Financial conditions… The fact that financial conditions entered a growth-damaging tightening cycle has normally and in the past caused the Fed to slow down or withdraw from the tightening cycle. Today, however, inflation causes such an area of​​movement to not exist. Considering the criticism that the Fed is also slow to act against the severity of the current inflation wave, it seems likely that it will create a more aggressive move to catch the curve. It is likely that inflation will not decline significantly until at least the fourth quarter.

We can also refer to the ECB for the inability to take a step back due to the problems caused by inflation. In Europe, which is expected to experience a serious recession due to the Russian crisis, there is also concern about import inflation due to the weak Euro, and the June ECB meeting therefore includes some possibilities.

Conclusion? Continuing high inflation paves the way for an aggressive monetary policy tightening from the Fed. High prices, combined with higher borrowing costs, are poised to curb activity, leading to a significant moderation in economic growth. Under current circumstances, it seems likely that the FOMC will increase the federal funds rate by 50 basis points at each of its next three meetings and continue in the classic band of 25 basis points in the next cycle. The key fact will be the state of real interest rates and the route to neutral interest rates. Therefore, any step that will raise these predicted bands will have a marginal effect.

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