Dr. Lan: What's The End of Rate Hikes & What Powell Fears Most

Latest Comment from Tiger Broker Market Commentator-Dr Lan.

Fed's rate hike decision seems to be certain. It's basically 75 bps judging from the futures market, with a negligible probability (20%) of 100 bps. Powell will definitely follow the market's expectations. Investors should focus on the discussion around the future policy path on September FOMC meeting.

Welcome to Read:

82% probability of raising interest rates by 75 basis points

Fed is likely to Raise by 75bps, SPX Short-term Reverse Needed?

[PREDICTION] How will SPY close on Wednesday 21 Sept?

Source: CNBC.com

After this rate hike, the US fund rate will enter the 3%-3.25% range. This rate is essentially flush with the current 10-year rate, and even though the 10-year rate will continue to climb after the rate hike, the curve will definitely flatten.

Now there are 2 other questions to ponder:

  • What is the end of the Fed's rate hike - 4%? or 5%?
  • Will the Fed stop raising rates or even start lowering them by early next year as the futures market predicts?

Before we analyze the path of the Fed's rate hikes, let's look at Powell's style.

1. Powell's personal style - not confident

People who have followed Powell for a long time and analyzed his personality will know that he is not confident.

Powell's lack of self-confidence comes from 3 areas:

(1) lower education background than that of the former Federal Reserve Chairman

(2) bullied by the first president he met after taking office

(3) encountered an unprecedented pandemic and high inflation.

The unconfident Powell likes to quote history and often mentions "19xx" from time to time between his words. It is a very good habit to like to study history, especially in investing. Hedge funds also "backtest" the historical data. But when he quoted history too many times. People may feel that he is not confident about his own words.

The Great Inflation, which lasted for 17 years from 1965 to 1982, impacted on Powell's current characteristics. After WW2, the inflation was not obvious but there were 17 years of hyperinflation in The Great Inflation. This period wad also called

"the greatest failure of American macroeconomic policy in This period wad also called "the greatest failure of American macroeconomic policy in the postwar period" (Siegel 1994).

WSJ found that Powell is a great admirer of former Fed Chairman Paul Volcker, and often quotes Volcker's autobiography "Keeping At It" in his speeches.

Volcker's main achievement was to solve the 17-year-long US inflation. Although the US economy eventually entered a severe recession, inflation has also gone down.

2. Low inflation and high employment can't be achieved at the same time?

According to the classical macro curve "Phillips curve", we can only take one end between the two goals of inflation and employment.

If unemployment rate is low, then inflation will be high; if inflation is down, then unemployment will be high.

But the Phillips curve is not fixed; it will move up and down.

During the Great inflation, when inflation went high, the unemployment rate also went up. So hyperinflation becomes the main target for the Fed to deal with.

After the financial crisis in 2008, global inflation, especially in the US, has remained low, so the Fed's goal has been to raise employment. But now employment is saturated and inflation is high, so the Fed's goal is to deal with inflation.

3. Lessons from the Great Inflation

Why did US have a 17-year-long hyperinflation? There are both man-made reasons and the natural laws of the economy.

But one important lesson is that the longer hyperinflation lasts, the less likely it is that inflation will come down, creating a negative feedback.

It means "if the bread maker expects the price of flour to continue to rise, then the bread maker will raise the price of bread; if the landlord expects the bread maker to raise the price of bread, then he will also raise the price of rent". When everyone expects inflation to continue, then inflation will become more stubborn.

Powell also know this. So he repeatedly says that he wants to wipe out inflationary expectations in society.

For Powell, the goal now is to deal with inflation at all costs, and the longer hyperinflation lasts, the more troublesome it becomes. Therefore Powell will not really care about the stock market rise or fall.

So if the market still interpreted his words as dovish, and the stock market rises, Powell should not be happy. The stock market rises will also drive inflation: company stocks rise, then the company's capital expenditure will also rise.

4. The end of rate hike is 4% or 5%?

The analysts have different estimates on the end fund rate:

But I think 4% or 5% will not be the ultimate goal of the Fed, because the Fed does not have an ultimate goal. We can refer to the end rate during the Great Inflation when Volcker raised the interest to 20%.

Many people knew that the Fed would cancel the dot plot this time, but no one bothered to why is that. The dot plot will give the long-term path of rate hikes.

The Fed canceled the dot plot this time because Powell does not want to give the market any hope of the possible "end of rate hike". Powell does not want the market to interpret the dot plot as: After another 100 bps, the Fed will stop rate hike.

Bottom Line

During the 17-year great inflation, inflation was up and down many times. The lowest point of the inflation retreat was once at 3.7%, but then it rose rapidly again.

I don't know if history will repeat itself. But Powell will learn from history and dare not ease up on rate hikes, let alone cut rates. Even if inflation falls to 3.7%, Powell may not cut rates in order to avoid a similar repeat of hyperinflation this time.

Any expectation that the Fed will turn dovish is illusory.

# Macro Trend

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  • Ericdao
    ·2022-09-21
    TOP
    U r v right.Powell lack confident.If DT still in office, he will never allow Powell to increase.He just interested in his KPI, ie, to bring inflation down to 2%.He will do any stupid act to achieve it
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  • KingCrab
    ·2022-09-21
    TOP
    A targeted rate of 5.25% by the end of 2033 is not an unreasonable proposition and has been factored in by Wall Street. All Powell needs to do is to watch the data coming in and calibrate the rate hike in the meantime.
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  • MIKEEEE
    ·2022-09-21
    Good read, thanks for sharing
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    • LgdnicReplying toKristo
      Ok
      2022-09-21
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    • TyroneTy
      [Smile]
      2022-09-21
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    • Kristo
      ok
      2022-09-21
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    View more 1 comments
  • Samluo
    ·2022-09-21
    Powell wont scare the market. He will follow the 75bps that is expected and market will have a brief rally before the next scary news or cpi miss comes again to tank the market
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    • mmcjb92
      6
      2022-09-21
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  • Et1502
    ·2022-09-21
    TFS. Smart Analysis… & a bit of predicting as well. Historical data & History may or may not repeat itself. Is anybody guess?
    Just got to stay invested cautiously.
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  • Lewis Foong
    ·2022-09-21
    Well said
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    • szeYah
      6
      2022-09-21
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  • 不错的分享.谢谢
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    • jamieee
      Ok
      2022-09-21
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  • Kenwen
    ·2022-09-21
    看?k
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  • WillsonToh
    ·2022-09-21
    100 basis point please
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  • MoneyCentral
    ·2022-09-21
    End rate will be higher than many expect and he certainly lacks confidence in what he does as he appears to be the biggest fool now having testified repeatedly that inflation is transitory
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  • 大跌要来了
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  • Iverader
    ·2022-09-21
    Nice share
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  • 小辉goPro
    ·2022-09-21
    sometime confident did not feel the Powell, people need more power person [Cool]
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  • Braight
    ·2022-09-21
    At some point,  they have to stop hiking interest?
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  • Humbly
    ·2022-09-21
    I see the maximum rate to be 5% or slightly below that, which will only be reached by June next year
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  • ilod
    ·2022-09-21
    Thanks for sharing! 😘
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  • Alexsj2021
    ·2022-09-21
    立刻评论说
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  • jethro
    ·2022-09-23
    thanks for the share
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  • jethro
    ·2022-09-23
    thanks for the share
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  • Thalos
    ·2022-09-21
    Mid term downtrend as i see
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