To The Moon

Here are the key takeaways of US Fed September meeting:

• Higher interest rates for a longer time
• Volcker-esque Powell
• Putin factor

Higher interest rates for a longer time

The US Fed took an indirect way to shock the market. It stuck to the market expectations of raising interest rate by 75 bps.

But what caught the market by surprise is that itraised the dot plot significantly. The key 2023 median dot was raised to 4.625%. This is much higher than the market expectations of 4.1% for the end of next year. Below are the details of the dot plots:

• 2022: 4.375% versus 4.125% expected, 4.23% priced
• 2023: 4.625% versus 4.375% expected, 4.12% priced
• 2024: 3.875% versus ~ 4% expected, 3.47% priced
• 2025: 2.875% versus ~ 3.375% expected, 3.23% priced
• Long-run: 2.5% versus 2.50% expected

In other words, the US Fed is communicating to the markets that interest rates are heading higher and will stay there “for some time.” This is in stark contrast to Fed Chair Powell’s loose monetary policy stance last year when he regarded inflation as ‘transitory’.

Volcker-esque Powell

Powell also stated that we are taking “forceful and rapid steps” to bring inflation to 2%. He is showing his resolve that he will do whatever it takes to stop inflation. This is similar to the former Fed Chairman Paul Volcker who broke high inflation with punishing rate increases in the early 1980s.

In a further similarity to Volcker, Powell appeared to have subtly reference Paul Volcker by quoting his autobiography, “Keeping At It.” Towards the end of his opening statement, he states that the US Fed will “keep at it” in their fight against inflation.

This is also nothing new, as Powell gave a speech earlier this month with a subtle reference to Volcker that “we will keep at it” until the fight against inflation is over.

Putin factor

Russia President Vladimir Putin could possibly have made Powell’s fight against inflation a tougher one.

Yesterday, he announced the partial mobilization of the Russian population, including calling military reservists into active service. This is an escalation of the Ukraine conflict and could possibly boost crude oil prices.

In the recent August CPI figures, one silver lining is the falling oil prices as gasoline prices fell 10.6% in August, the biggest monthly drop in more than two years. But inflation was still red hot as everything else increased.

Now, consumer prices could come down as a possible recession reduce demand for consumer goods and services. But, this could benegated if oil prices shoot back up.

Crude oil prices are languishing at $84.1. This is about a 30% drop from the high of $121.7 this year. If crude oil prices rally back to $120 as a result of geopolitical tensions, inflation will continue to be a problem, regardless of how many rate hikes the US Fed makes. This will be a worst-case scenario for Powell.