Fed’s Daly: The Market Is Wrong About A Hump in 2023 Fed Rates

The Federal Reserve board governors continue to stay on message, reminding the market over and over about its serious intention to fight inflation. San Francisco President Mary Daly has been particularly articulate on the Fed’s plan and what likely lies ahead. In an interview with Bloomberg Finance today, Daly informed financial markets that they are “wrong” to project what the interviewr called a “hump” in rate expectations. This hump is a peak sometime in 2023 with rate cuts to follow soon after. The current view from CME FedWatch has rates peaking from the February through June, 2023 meetings with a rate cut in July.

A peak in the Fed rate from February through June, 2023 and an easing cycle starting with a single rate cut in July.

Daly’s steadfast perspective is important to remember every time the stock market rallies in anticipation of peak inflation and/or a “Fed pivot.” Indeed, Daly warned that the Fed needs to be prepared for inflation to be more persistent than expected. For context, Daly was one who was unwilling to predict peak inflation ahead of what turned out to be the “CPI shocker” that delivered a surprise of higher core inflation. Part of Daly’s persistence comes from what she and the Fed see as inflation’s greater potential for economic harm than the short-term consequences of normalizing monetary policy. Daly noted that over two years real wages have fallen 9%. She even shared an anecdote of a worker who told her about how he “loses” money when he goes to buy something with his earnings (an anecdote that speaks to nominal wages failing to keep up with nominal increases in prices).

Other interesting nuggets from the interview:

  • Rates are probably now around the neutral rate, and the Fed needs to get slightly restrictive.
  • The length of time rates stay neutral (or slightly restrictive) is more important than the specific level.
  • 50% of today’s inflation is driven by demand (thus justifying the Fed’s desire to get slightly above neutral), 50% from supply.
  • Daly refused to take the bait on the question of whether the Fed was purposely trying to induce a recession, trying to force losses on the stock market, or intent on hiking rates until something breaks.
  • Daly insisted the Fed is forward-looking and recognizes lagging indicators of inflation.
  • Daly pushed back on the notion the Fed needs to coordinate with global central banks. She insisted that the Fed must stick to its domestic dual mandate.

While the signs a few months ago were clear from commodity prices that the Fed’s actions were impacting inflation, the recent strength in oil threatens to rekindle inflation fears from the average person. For example, gas prices look like they are already done declining. The United States Gasoline Fund, LP (UGA) broke out today. UGA looks like it double-bottomed in September.

The recent downtrend in United States Gasoline Fund, LP (UGA) came to an end this week with a powerful breakout above 50 and 200DMA resistance.

Similarly, diversified commodities producer BHP Group (BHP) looks like it is holding a bottom in place since late last year.

BHP Group (BHP) has so far held its lows from a year ago. While upside may be limited, BHP also looks like it is done going down for now.

If these bottoms are indicative of what is ahead, then any soft readings in the near-term inflation numbers could be, well, transitory… (tongue-in-cheek intended!)

Be careful out there!

Full disclosure: long BHP

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3 Comments on “Fed’s Daly: The Market Is Wrong About A Hump in 2023 Fed Rates”

  1. Gary H says:

    That is an absolutely terrific interview; I can’t recommend it to your readers strongly enough. McKee quickly asks the hot trader-media questions, and Daly quickly debunks the whacky ideas. Then – I was open-mouthed in astonishment at this – McKee switches gears, shows he actually understands the global situation with a prudent investor’s mentality, and asks deeper and more nuanced questions that are premised on what she has said. I am so used to dilettante interviewers who don’t understand the answers they’ve gotten and blindly plunge ahead with pre-written questions those answers made irrelevant, forcing interviewees to rephrase their earlier answers and wasting the viewers’ time.

    As a data geek, I would have liked to hear some Q&A about the speed with which rates are being raised. Too-fast raises convince companies that a recession is coming, and they react by counter-productive measures to reduce supply. Below-capacity production exacerbates boom-bust cycles.

    We’re seeing that in oil, as OPEC this week announced a 2M bbl/day production cut that immediately reversed the downtrends in both crude and distillates.

    We’re also seeing that in semiconductors. Micron this week simultaneously announced a new fabrication plant in NY (to come on line many years from now), but more immediately a 50% cut in planned 2023 capex. That cut will directly reduce global supply of DRAM (computer and mobile device memory) and NAND (computer and mobile device storage). They are doing that to support the prices of their chips, which would otherwise fall to single-digit margins… which would have helped the Fed’s anti-inflation effort.

    These two examples are proof that at least in those niches, raising rates too quickly has had a counter-productive effect.

    Incidentally, I picked up on something only a few of the viewers of this video would recognize: Daly said she was just in Boise Idaho. The dominant employer there is Micron, which made those big announcements right around the time she visited. Coincidence? 😉

    • Dr. Duru says:

      Interesting point on the damaging feedback loop on recession signals. That’s something I need to keep in mind. I don’t think I’ve seen anyone else ever mention this ironic, inflationary effect of hiking rates enough to stoke recession fears.

      I totally missed the Boise reference. If I had noticed, I sure wouldn’t make the Micron connection!

  2. […] Fed’s Daly: The Market Is Wrong About A Hump in 2023 Fed Rates → […]


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