Pro Perspectives 7/26/22

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July 26, 2022

The interest rate market has a 75 basis point rate hike priced in for tomorrow's Fed meeting.
Let's revisit the Fed's projections from their June meeting. 
They revised down their 2022 estimates on GDP growth by more than a percentage point (to 1.7%).  They revised UP unemployment (but still well under 4%).  And they revised UP inflation.  
So, slower growth, higher inflation.  
We've seen it. 
Back in June, they also revised UP, dramatically, their projection for where the Fed Funds rate would sit at year end — to 3.4%.  
If they follow through with a 75 basis point hike tomorrow, in line with expectations, they will get the Fed Funds rate up to 2.25%-2.50%.
But remember, as we discussed yesterday, this will put the Fed Funds rate very close to where the Fed was forced to stop and reverse it's tightening campaign in 2019. 
Why did they stop and reverse? 
Things started breaking in the financial system.  And emerging markets were under the stress of capital outflows, driven by rising U.S. interest rates (threatening a global sovereign debt crisis).
Not only did they cut rates in July of 2019, they quietly stopped shrinking the balance sheet and restarted QE by late summer. 
With all of the above in mind, despite the continued jawboning and "guidance" the Fed continues to promote, we've discussed the likelihood that tomorrow's hike could/should be the last in this tightening cycle — for no other reason than the financial system and global debt markets can't withstand higher rates. 
Now, consider this …
We still have $6 trillion of money supply growth in the U.S. economy over the past two years.  That's an increase in the money supply by one-third.  It's ten years of money supply growth in two years.  The result?  A reset in prices higher (i.e. a devaluation of money in your pocket). 
Still, fiscal policymakers are so (not) concerned about this rate/inflation conundrum that they (the Senate) have just approved another $280 billion fiscal spend. 
This is the "Chips Act," of which only 19% goes directly toward subsidies for chip makers. 
That leaves $228 billion worth of handouts allocated in the name of "research."   The section-by-section summary at is littered with money for "energy."  This looks like Build Back Better lite.
More fiscal spending, with monetary policy tools exhausting, is a formula for higher asset prices.   
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