Can Fed Reduce Its Tightening Pace?

Most bulls want to see more concrete evidence that inflation is starting to wane before diving back in.

Interest rates in detail

Historically, stocks have a hard time gaining ground when the Fed is in the beginning or middle of a tightening cycle. Past tightening programs have typically utilized rate increases of 25-basis points, but the Fed is hiking three-times as fast right now with a 75-basis points hike in June and the same expected for July.

Some Fed officials have hinted that a full percentage point hike could be on the table for September (there is no Fed meeting in August) if prices are still rising. Bulls believe that a pullback in inflation over the summer could provide the central bank with an excuse to reduce its tightening pace or even pause rate hikes.

Weakness in commodity prices

Many bulls are pointing to recent weakness in commodity prices as a hopeful sign that underlying inflationary pressures are starting to find some relief. Those in the bear camp warn that the slump may only be temporary though, as China is still trying to ramp its manufacturing sector back up after months of Covid lockdowns.

It’s also not clear how energy politics between the West and Russia will play out and what the impacts might be to global oil and natural gas prices. There is also concern that Russian output is going to begin to tumble as sanctions limit the country’s ability to service its oil and gas infrastructure. Several OPEC countries are also dealing with political unrest that is threatening output there as well.

What’s more, global ag producers have an entire season of weather and chemical supply shortfalls to get through before we really know where food prices might be next year.

Bottom line, bears question whether commodity prices have much more room to come down and believe raw material prices will likely keep inflation underpinned and hot for many more weeks and months to come.

There are undeniable signs that the transition out of the “cheap money” era is already cooling some sectors of the economy, particularly housing.

Data you need to know

Data yesterday showed that Pending Home Sales did see an unexpected bump in May but were still down almost -14% versus last year and housing analysts caution that a considerable slowdown is still in store with mortgage rates expected to keep climbing.

The good news is that the housing market slowdown has also corresponded with cooling demand for construction materials as well as things like appliances and furniture. This and similar slowdown trends across other sectors should theoretically help cool consumer prices.

The bad news is that housing is responsible for about 62% of US household wealth, so a slowdown or pullback in home prices would pose another threat to consumer spending and raise the risks of a recession.

Investors today will be digesting Consumer Confidence, the Case-Shiller Home Price Index, Richmond Fed Manufacturing, and advance reads on International Trade, Wholesale Inventories, and Retail Sales.