Powell is hard-pressed toward ensuring we don’t enter a sustained period of inflation. The Chairman has stressed and admitted that the Federal Reserve’s policy can do little about supply interruptions from a ground war in Europe, but these interruptions nonetheless make his job significantly harder. He acknowledges that the pathways toward a soft landing have gotten considerably narrower. Somewhat ominously, he also said that “the clock is kind of running out on how long will you remain in a low-inflation regime.” If some folks thought the Fed was facing a Sophie’s Choice between curtailing inflation and curtailing growth (and the collateral damage that occurs as a result), the Fed is clearly saying that they would prefer to tame inflation.
The 10-yr came down significantly this week. They started the week at 3.2% and settled below 2.9% on Friday. The rates are likely coming down as recession fears start to rise. They came down after the PCE reading and after Powell’s remarks on Wednesday. Fed Governor Loretta Mester also mentioned she sees the Fed as on course for another 75 bps hike at the upcoming meeting. The Atlanta Fed’s GDP tracker showed an estimated growth rate of -2.1% for the second quarter, suggesting the United States economy may already be in the midst of a recession.