Last week, the Federal Reserve won its undeclared war against the market. For
months, the market had been pricing in rate cuts, despite the fact that the
Fed had given no indication whatsoever that any rate cuts were in the offing.
No longer: the curve is steepening, the priced-in probability of a rate cut
is down to zero, and the markets admit that worsening inflation is a bigger
problem for the Fed than falling GDP growth.
All this is not enough, however, for Irwin Kellner, who thinks
the Fed should
and will raise rates in two weeks’ time.
Judging by the number of signals that central bankers have sent in recent
weeks, the Fed could very well decide to raise rates as early as this month.
If they don’t move in June, then they’ll probably pull the trigger in August.
After all, there’s a limit as to how much more inflation the Fed can afford
to tolerate before the markets begin to question its credibility.
I can just about understand – although I don’t necessarily buy –
the June rate-hike call. Inflation is rising, the Fed has said that it’s worried
about inflationary pressures, and there’s got to be some chance that the Fed
will do what it has long said that it might do.
But I don’t buy the credibility argument at all. Remember that up until last
week, the market thought a rate cut would be more likely than a rate
hike – and they thought that without impugning the Fed’s credibility one
iota. If the Fed fails to hike in June, that will be just fine by the market.
The way I see it, the market increasingly sees a rate hike as possible, but
it’s a long way from seeing a rate hike as necessary. The Fed is still ahead
of the curve here, which means that its credibility, at least for the time being,
is not at issue.