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Did Fed just Caved ?

Yesterday the minutes of the July FOMC meeting for released and it was as conflicting if not more than the ones from the last months of 2021 when the Federal Reserve started to accept that inflation is not "transitory" as thought. In the current minutes, the conflict is different but more important. There are signs that they might have risked the system by increasing too much too soon. This conflicts with the statement that there are no signs of inflation being past its peak.

They have also discussed reducing the quantum of rate increases. This has resulted in increasing the odds of 50 bps holes in the September meeting. Members also pointed toward an increase in the unemployment rate in the later part of this year. It was also mentioned that to ease inflation demand must fall.

All these statements are pointing in different directions resulting in a crossroads different than last year but for sure having larger and longer consequences if picked wrongly. More clarity on the path ahead will be presented at the Jackson Hole event that is scheduled from 25th August till 28th August.

The importance of the next two quarters' rate and inflation trajectory is very critical. Any signs that we are past the large quantum hikes might bring back demand with much-unexpected strength during the festival season. This would bring inflation back in focus for the quarters ahead as the supply chain has seen some relief but not the relief that would absorb any demand spikes.

And if the Fed eases from here then the next level of the fight with inflation will get more ugly as they would have to react with much higher rates and deeper tightening. In the past none of the time, inflation came back to normal without being in recession or rates rising more than inflation rates. Will This Time Be Any Different?


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