U.S. financial conditions remain somewhat accommodative and conducive for investment within an economy growing at full-employment levels.
That positive reading suggests there is room for the Federal Reserve to begin to address the five-year-long inflation issue.
This is one reason why we expect the Fed to hike its policy rate by 25 basis points to a range between 3.7% to 4% at its meeting on Wednesday.
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We expect the Fed to raise its policy rate at its September and December meetings this year and most likely at the March meeting next year to begin driving inflation back toward the Fed’s 2% target.
The Summary of Economic Projections, which will be released Wednesday, will show when the Fed expects inflation to return to its 2% target. This will be the likely determinant of whether the policy rate decision will be a one and done event or not.
Our RSM US Financial Conditions Index remains positive at 0.8 standard deviations above zero, with consistent readings across the major financial asset classes.
However, volatility is on the rise in both the equity and bond markets, while the recent downtrends in pricing suggest growing skittishness over the direction of both monetary and fiscal policy.
The takeaway
Overall financial conditions remain somewhat accommodative, which in our opinion, gives the Federal Open Market Committee room to begin hiking its policy rate back to early 2025 levels.
It is now appropriate for the central bank to move toward tightening financial conditions via a modest rate hike campaign with the objective of returning inflation back to the 2% target in a timely fashion commensurate with maximum sustainable employment.
