Fed vs. Wall Street: How Markets, Central Bank View Inflation Differently

Full Video Transcript Below:

J.D. DURKIN: ​​Are the markets and the Fed on as different pages, on pages that are as far apart as many people say that they are

ART HOGAN: 100%, I think that when you think about the good news, the good news is the Fed clearly has gotten to a place rapidly. They started too late, so they got to the restrictive level rapidly and likely they’re getting to the end of this cycle, meaning they’re going to stop raising rates. What that does is it allows the economic data to be looked at in intuitive fashion. When we’re in the middle of a rate hiking cycle, everything is sort of looked at through the lens of what does this mean to the Fed? Does that make them more aggressive? Does that keep them tighter for longer? When they pause, that gives us an opportunity to look at data and say, OK, this is good news and good news is good news, right? And the market doesn’t have to have that counterintuitive reaction to news.

The second thing that it does is it allows us to understand that the Fed has reached that level of restrictiveness and we can interpret inflation data and say, OK, at some juncture, they’re likely to see this as being too much and not wanting to linger too long and slamming the economy into a recession. So I would say where the street and the Fed are lined up is that there’s a nearly 100% assumption that they’re going to raise by 25 basis points. The street is in the same place as the Fed. And we’ve heard a whole parade of Fed speakers talk about that. Where the street differs from where the Fed is they’re, the street thinks they’re underestimating how much inflation is coming down, and overestimating the strength of the labor market. And therefore, the street has a couple of rate cuts at the end of this year. I think that’s more likely to what ends up being a reality. I just don’t think the Fed wants to talk that easy game just yet, because what they say probably has as much impact on the markets as what they do.