On the June FOMC

A 75 bp hike, and a sharp move up in the “dot plots” raising the terminal funds rate in this cycle close to 4%. Market expectations were shaped to expect this on Monday, so no negative surprise. A positive surprise is that Powell said that another 75 bp move was unlikely. The Fed has panicked, based on a fallacious understanding of inflation inflamed by an erroneous understanding of Friday’s CPI data. A correct reading shows inflation already moderating over the last three months, in line with the year-ago cessation of pandemic spending programs and the corresponding moderation of M2 money growth. Powell was clear that coming inflation reports will determine the policy path. Today’s new funds rate is not itself restrictive. The improving inflation data we confidently expect will keep the future path of policy from being crushingly restrictive.