The Federal Reserve is widely expected to raise rates by 25 basis points at its meeting later this week. Dreyfus and Mellon Chief Economist Vincent Reinhart tells Yahoo Finance Live that the Fed didn’t pause at it’s June meeting, rather it’s pairing hikes. However, with the next pair being September and November, Reinhart notes “November is a long way away. I’m not so sure they’ll actually deliver another quarter-point hike.” Later in the interview, Reinhart explains why the next “leg of Fed monetary policy or restraint goes from prices, interest rates higher, to quantities, bank balance sheets tighter.”
Video Transcript
– Well, Jay Powell is going to take center stage once again to report the latest Fed policy decision in July. This comes after officials decided to pause rate hikes in last month’s meaning. Most economists expect rates to rise another 25 basis points or a quarter point, while the Fed last month pointed to two more potential rate hikes this year.
Here to discuss the latest in the landscape for financial conditions, we have Vincent Reinhart, Dreyfus and Mellon chief economist. Vince, I love that you led your note with a Yoda reference and talked about two more increases coming. Is that still the base case here is that this is not going to be the last rate increase that we will get?
VINCENT REINHART: So I wouldn’t say they paused the rate hike in June. They paired the rate hike in June. They’ve slowed the pace of tightening from 75 to 50 to 25 now to 12 1/2 basis points per meeting. The way you do 12 1/2 basis points a meeting is you skip one, then you tighten by 25. June was the skip. July is the sure delivery of 25 basis points.
That’s why everybody universally has the expectation of tightening. What do they do after that? Well, if they’re pairing meetings, then we’re not talking about the meeting after this one. We’re talking about the next two, September and November.
November is a long way away. I’m not so sure they’ll actually deliver another quarter point hike. It’s going to depend on the data. It’s going to depend on what Jay Powell says Jackson Hole at the end of August. And we’ll get a little hint of that in the press conference on Wednesday.
And so even as we kind of look through the data and where we’re already starting to see some cracks as a result of either Fed policy or just as a result of this being expected while they’re cracking down on inflation, where are we seeing some of those weak spots right now as the Fed is evaluating it?
VINCENT REINHART: Well, the data are mixed. We got a little bit of a confusion on the PMIs, as you noted earlier. Manufacturing has tended to slow more. We already got a housing recession. That’s about higher interest rates and Federal Reserve restraint.
What’s in the works is the constriction of bank balance sheets. Deposits are off, about 5% on a 12-month basis. Lending growth has stopped. It’s coming to the point where it will be contracting soon. The securities portfolios and banks are already contracting.
So the next leg of Fed monetary policy restraint goes from prices, interest rates higher to quantities bank balance sheets tighter. And that’s what comes next. And it’ll be reinforced because quantitative tightening really is going to be getting some traction over the next six months.
– So let’s talk a little bit more about quantitative tightening and how much it then magnifies and extends the rate hikes that have already been enacted, right. So does that mean that in some measure, we are sort of underestimating the effect of tightening because we’re not taking into account enough the quantitative tightening that’s happening?
VINCENT REINHART: I think that’s exactly right. That’s why I worry about recession, not that the yield curve is inverted. It’s been inverted for a real long time. Jay Powell worries about restriction, but it’s as a result of the bank run.
I think it might be about the Federal Reserve’s balance sheet. In full disclosure, wrote…
Read More: Fed didn’t pause in June, they paired the rate hike in June: Economist