Is The Fed’s Heavy Lifting Almost Over?

Don’t bank it.  Avoiding a recession is not part of the Fed’s explicit dual mandate. 

The Federal Reserve System has been given a dual mandate—pursuing the economic goals of maximum employment and price stability. – St Louis Fed

Even after today’s 75 bps hike, the real Fed Funds rate (see chart below) remains at about -5 percent.  Note from the chart the economy has never kicked into a recession with a negative real Fed Funds rate.  It’s amusing to watch the market watchers muse over how big a recession the Fed will create. 

Yes, a recession is highly probable, and the timing is difficult, but markets have a yuuuge “failure of imagination.”  There can be, simultaneously, a recession in economic activity, relatively high and sticky inflation, and relatively low unemployment.  

Chairman Powell stated in his presser today about moving real rates to positive levels across the yield curve.

You wanna be at a place where real rates are positive across the entire yield curve – Chairman Powell, 18:50 into the video

This time could be different, it is pretty weird out there, making monetary policy very difficult,  but we run when we hear those four words.