00:00How much is riding on this inflation print? Are we already looking at a 25 basis point hike next week?
00:05And this will just be confirmation, Isabel?
00:08Good morning, Voni. Well, I think there's a little bit more focus on this inflation print than usually.
00:14And that's because Fed Chair Walsh, frankly, teed it up as being a key input into deciding whether the FOMC
00:22will hike or not.
00:24Our base case is they will. But frankly, if inflation were to come well below expectation, that's roughly below 0
00:34.2% month on month for core, then that would give the FOMC a reason not to hike.
00:42But frankly speaking, the bar that Chair Walsh has set in Jackson Hole seems pretty low to clear for a
00:50hike next week.
00:51Isabel, we have three and a half days before we get that Fed decision after today's CPI report.
00:58Is there any concern that we might see some kind of market event between now and then, given that yields
01:03have moved up so much?
01:04I mean, we're talking about 20 basis points in a week. Is that too long before we hear from the
01:10Federal Reserve?
01:12I don't think so. I mean, look, yes, yields have been going up, but there's been, frankly, nothing disorderly about
01:19it.
01:19Yields have been going up as markets have been repricing their expectations of central bank rate hikes across the board.
01:28It's not just a U.S. phenomenon. You saw this in Europe, in the U.K.
01:33And to me, this is being driven by what's been happening in the Gulf, where there's no sign of de
01:38-escalation, rather the opposite, and that's pushing up oil prices.
01:43I think that's been the key driver. This is not disorderly movements.
01:50We are more than 90 basis points above the effective Fed funds rate on the two-year, right?
01:56How does that get closed? Is 125 basis point hike enough?
02:01And will the Fed need to signal there's more coming?
02:04Or does the bond market just stay diverged from the Fed funds rate for a long time to come?
02:12Well, so I think Chair Walsh has been very clear. He doesn't like forward guidance.
02:18So I very much doubt that the FOMC will say this is the beginning of a cycle.
02:22Whatever they do, and even if they hike, they'll say, you know, we'll see what comes next.
02:28But, you know, again, in our analysis of what's going on in the U.S. economy right now, we're seeing
02:34a new cyclical acceleration.
02:36And so we do think, yes, that monetary policy is not restrictive enough and that we will need probably three
02:43hikes starting next week.
02:45But I would be very surprised if we heard this from the chair next week.
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