The next FOMC meeting is on June 14-15, and we are entering the typical, 2-week 'dark' period when FOMC members stop publicly commenting on monetary policy. However, there have been a series of Fed speakers and developments in terms of economic data that have made the Federal Reserve's near-term path pretty clear.
And, this clarity might be one factor behind the recent strength in stock prices. Another equally impactful factor is that the market seems to have fully priced in inflation and the Fed's hawkishness in response to it. This is evident in the sharp rise in short-term yields, while 5Y or 10Y breakevens which measure the market's assessment of inflation peaked in mid-March and are now rolling over.
Due to this development and possibly the recent softness in housing, industrial, and labor data, things are moving in the right direction for the Fed. It seems that the current expected policy path is for two, sequential 50 basis point hikes at the next 2 meetings and then back to a wait-and-see, data-dependent stance.
Of course, the next major question is whether the Fed can be successful in its delicate task of choking off just enough economic growth to tamp down inflationary pressures but not letting the economy slide into a recession.
History tells us that the Fed's chances of pulling this off are slim, especially in high inflationary environments. Clearly, we are already seeing signs of weakness start to spread throughout the economy whether its weakness in e-commerce, starting to show up in ad spending, or higher energy prices impacting discretionary spending. And, with nearly every company focused on cost-cutting, this could mean the current pain is only beginning.
As the famous saying goes - one company's costs are another's revenue.
Maybe the best clue as to whether or not the Fed is succeeding in this endeavor is credit spreads. These measures the difference between the yields of Treasuries, corporate bonds, and junk bonds. Wider spreads are an indication that tighter money or the economic weakness is beginning to have a material impact on the real world rather than just on financial markets. So far, spreads have remained contained which increases confidence in the Fed's policy path.