White said market expectations for today’s potential hike have already been factored in, so Picton Mahoney’s new Q3 2022 Investment Review and Outlook focuses more on when the Fed could pivot.
“We don’t expect it to be immediate. The Fed will need some signs of further easing of longer-term inflation expectations before it can make that pivot,” he said, adding that he doesn’t believe that the Fed needs inflation to drop right back to 2% in order to pause, but it will have to see a meaningful shift in inflation for it to let up on the hikes. “Probably something with a four handle on it will likely allow them to soften up on their hawkish tone.”
White said that while a lot of the leading indicators for inflation have already started to decrease, Picton is also seeing some small layoffs, which may suggest the labour market isn’t quite as tight as thought. So, he expects the rate of change in year-over-year inflation will ease.
“The big question is: will it be enough to allow the Fed to pause before it’s done too much damage with further rate hikes?” he asked. “If we’re looking at September-October, and we haven’t noticed them being less hawkish, then they’ll continue to push and maybe then the real risk is that they raise rates high enough to force a recession. Right now, our view is that is less likely. But, that’s the hurdle in terms of timing as we see it.”
White expects a 75 basis point hike today. He doesn’t anticipate a 100 basis point hike to mimic Canada’s latest since he said 75 basis points of that was expected and the extra 25 basis points was to catch up to the Fed. But, he said today’s anticipated 75 basis point hike is already baked into the market, so he’ll watch the press conference for signals as to when the Fed may begin to ease hikes.
