Fed Attempts ‘Dovish Hike’
The Fed today attempted the highly difficult “dovish hike”. What is a “dovish hike”? Think of it as like the triple axel in figure skating or the double clutch in basketball. It’s the gold standard of central banking moves, one every would be Fed Chair dreams of pulling off as a child. On the the one hand, you increase rates to show you’re still serious about tackling inflation. On the other, you say you’re concerned about the banking crisis and might be done hiking so as not to further destabilize the financial system.
Did Powell pull it off? In figure skating, it’s immediately clear if the skater landed a triple axel. Monetary policy – however – acts with a lag. If you overtighten (i.e. fail to stick the landing) things don’t blow up immediately. But eventually they do blow up and you’re forced to reverse course and cut interest rates. That’s when you know you didn’t pull off the “dovish hike”. Markets now see a 4% Fed Funds rate on January 31, 2024; in other words, they don’t think Powell will stick the landing. Only time will tell….