by Dave Allen, The International Forecaster:
Market bull Phil Orlando believes the Fed will raise interest rates six times over the next two years to reign in significant ongoing consumer price increases.
Last week he said, “…we will see two quarter-point rate hikes…in the second half of , and perhaps another four quarter-point rate hikes over the course of .”
In other words, Orlando and his firm, Fidelity Hermes, see the Fed Funds rate rising from its current 0% to 0.25% range to 1.75% to 2.0% two years from now.
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The first expected major rate move envisioned in the CME Group’s FedWatch tool is next May — when traders see a 38.4% chance of rates increasing to at least 0.25-0.50%. Those chances rise to 63.2% in June 2022.
By July next year, there’s a 48.2% chance that rates will be increased to at least 0.5%-0.75% and a 49% chance of rates going to at least 0.75%-1.0% in February 2023.
Fidelity sees three additional quarter-point increases during the rest of 2023 to get to Orlando’s target range of 1.75% to 2.0%.
Orlando, whose company has roughly $634 billion in assets under management, is concerned about the government’s latest inflation numbers.
Both personal consumption expenditures (PCE) and consumer prices (CPI) are rising at their highest pace in over three decades.
The Commerce Department reported last week that prices for core PCE, jumped 4.1% in October from a year ago.
The core PCE inflation measure, which is most relied on by the Fed, excludes volatile food and energy prices.
The CPI-U (for all consumers) also rose significantly in October — it was up 6.2% year-over-year, including food and energy (but not seasonally adjusted).
However, if you use John Williams’ figures, applying government methodologies in place before 1990 and 1980, CPI-U is actually closer to 10%+/- to14%+/- as of the end of October.
Orlando said, “Given the surge in inflation that we’ve been seeing lately, it wouldn’t surprise me…if the Fed accelerated th[e] pace of tapering.”
“Once the tapering is done,” he added, “we’d expect to see some rate increases. That’s what could take Wall Street by surprise.”
He claims the Fed has been “talking a good game along with the Biden administration in terms of the transitory…nature of inflation.”
Yet, Orlando believes the Fed understands the magnitude of the problem. He cites the decision to start rolling back its purchase of $120 billion in Treasuries and mortgage-backed securities this month.
He says, “They’re going to remove accommodation at a reasonable pace over the next two years or so in order to try to get their hands around inflation and see if they can get that genie stuff back into the bottle.”
Six increases in two short years does seem a bit far-fetched for a Fed that’s been hellbent on an indefinite period of easing.
But in a second Jay Powell term, don’t count it out either. Even if the Fed were to just raise rates 3-4 times in 2022-2023, it’s more important to understand that one or more of those increases could be 50 basis point or more.
In other words, without knowing whom Pres. Biden will appoint to other impending vacancies on the Fed Board of Governors, it’s hard to know how any new board composition will move to deal with inflation and employment — wherever they both will be at any given time in the future.
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