All signs point north. The Fed’s Federal Open Market Committee (FOMC) is meeting today and June 15. Investors and market-watchers are preparing for a potentially faster and steeper rate hike, as inflation data was worse than expected — hitting 8.6% in May.
In addition, the Producer Price Index for final demand increased 0.8% in May, seasonally adjusted. This rise followed advances of 0.4% in April and 1.6% in March. On an unadjusted basis, final demand prices moved up 10.8% for the 12 months ended in May.
The consensus ahead of the FOMC report is a jump of 0.5 percentage points, says Chip Flory, host of AgriTalk. Although some analysts say the Fed could raise rates by 0.75 percentage points — which would be the first time since 1994.
“First of all, there’s no question that they’re going to raise rates and signal they’re going to raise rates further,” says Vince Malanga, president of LaSalle Economics. “Whether it’s 50 or 75, I think there are legitimate arguments on both sides.”
Listen to the AgriTalk discussion between Malanga and Flory:
Malanga’s hope, while unlikely, is for an even larger rate hike.
“What I would like to see the Fed do is to raise rates by 100 points and show they are determined to fight this thing and get out ahead of the market rather than lagging behind,” he says. “Then they could step back and assess things and see how conditions transpire over the next month or two.”
Malanga says the probability of the Fed making such a rate hike is less than 10%.
The Fed does not want to surprise the market, Flory says: “But sometimes you’ve got to give the market a surprise to get the results that you want.”
“A little bit of uncertainty is not a bad thing,” Malanga agrees. “I think the economy is already in some sort of a recession, which is why I want them to do 100 basis points tomorrow. If they do 100, in six or eight weeks from now they’re going to see substantial slowdowns in sectors of the economy.”
Is the U.S. In A Recession?
Malanga believes the technology sector is already in a recession or leaning quickly toward one. “Silicon Valley is slowing down; we’re seeing announcements of layoffs,” he says.
The housing market is also in trouble.
“We’re going to see a significant slowdown in housing turnover over the next month or two,” he says. “That’s going to give us a significant weakening in home prices.”
In retail, Malanga says, there’s a mismatch between inventories and sales, which will lead to a slowdown in orders, markdowns and more.
“How that all translates into GDP is more statistical than real,” he says. “But I think the point is that we’re seeing increasing evidence of slowdowns across the economy.”
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