Milan Cacic
September 23, 2022
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FEDERAL RESERVE RAISES INTEREST RATES ANOTHER 0.75%, TO 3.25%
In our note from a few weeks ago, we discussed how the market is inversely correlated to inflation. If inflation starts to go down, the Federal Reserve can stop raising rates and the markets will likely go up. As the chart below shows, it appears more likely that we hit peak inflation in June at 8.1%. Having said that, inflation is not decelerating as fast as the Federal Reserve would like, so they have not shown any signs that they will pivot and slow down the increases to the Federal Reserve rate. On Wednesday, they increased the rate another 0.75% to 3.25%, effective Thursday.
Source: Canada Inflation Rate, Statistics Canada, Trading Economics, September 2022
I mentioned in our note 2 weeks ago, the results of the rate increases today will not be felt for another six months. If inflation starts to decelerate quickly, it will be hard to reverse the trend, just like it is now. The only difference is the repercussions of it will be job losses and a much slower economy. For those that think that the Fed will not act quickly to cut rates if we go into a recession, please note the chart below and how quickly they moved the previous two recessions.
United States Fed Funds Rate
Source: United States Fed Funds Rate, Federal Reserve, Trading Economics, September 2022
The chart below gives you an idea of the direction of inflation over the last 3, 6, 12 and 24 months. From this, you can see that it appears inflation has rolled over and we are moving in the right direction. At this point we think the Fed should pause and see what the effect of the last three rate hikes will have. With any luck, maybe the inflation number next month will be considerably lower and cause the Federal Reserve to pause and rethink its trajectory. Regardless, we think the end of the rate hikes will be within the next 3 months.
I have also included a piece from our CIBC Economics Team titled “Tweedledee and Tweedledon’t”.
As always if you have any questions please feel free to give us a call at any time.
Have a great weekend.
Milan