Should We Believe the Fed?

The Fed became much more hawkish last week and let me show you—
· After raising short-term rates by ¼% they expect to raise those rates by another 1.75% this year and another 1% next year to put short-term rates at 2.75%.
· The Fed said it “expects to begin reducing its balance sheet at a coming meeting, possibly in May.
· Chairman Powell said that they will reduce the size of their balance sheet faster than they did in 2018-2019 when they decreased their balance sheet by a max of $50 billion a month. Expect balance sheet reduction of $75 to $100 billion a month soon.
· Why does this matter? This extra bond supply needs to be purchased by investors. This additional supply means bond prices will drop and rates will rise. I worry that we may see mortgage rates above 5% or higher soon.
· Powell said that the odds of a recession are not “elevated” over the next year and our economy can “flourish” even as the Fed becomes less accommodative.
· This is the same man who told us many times last year that inflation was transitory. Thus, I don’t believe this time either and I don’t think you should either.