June FOMC Preview: The Fed Traded Guidance Credibility for Inflation Credibility

This may have been the most chaotic market pricing into a Fed hike in two decades. Since the May CPI print (Friday), markets have priced more than 75 additional basis points of rate hikes for this year and have taken the terminal rate of this hiking cycle to just over 4%. Just eye popping moves in such a short period of time. And then of course there was yesterday, where 20 hours before a an FOMC meeting an article drops from Nick Timiraos (the number one Fed reporter) that the Fed is considering hiking 75bps at the June meeting this week. This locked in a 75bp hike for this week and likely will lock in another 75bp hike at the July meeting.

Friday was really a data disaster for the Fed, even if some of the guts of the inflation report weren’t so bad and the wedge between CPI and PCE is expanding. Headline CPI missed expectations and was +1% MoM, the longer term inflation expectations in the University of Michigan survey ticked up and the Cleveland Fed median CPI number went up. All of this after thinking that headline CPI for this cycle had peaked. Also, on the night prior to CPI, the Atlanta Fed wage growth tracker went up. For the quiet period, the data was a disaster for the Fed.

For this Fed preview I thought it would be helpful to look at the past few weeks, what tomorrow will look like and where the Fed goes from here.