The Fed will have to take rates beyond neutral to a somewhat restrictive pace. Today's data totally supports that view of the world and should...eliminate any doubts about the near-term course of monetary policy.
A lot of people were hoping June was a fluke and that employment would bounce back, but two in a row is pretty tough to write off. I think market investors are now more worried about the corporate and economic outlook.
If the economy keeps growing at a faster pace, the Fed may need to boost rates for longer than what markets are currently expecting. I think that's what the stock and bond markets are reacting to right now.
Barring an abrupt weakening in the economy, the Fed will continue to hike rates at a measured pace for the foreseeable future.
If inflation doesn't accelerate much from here, and the Fed just raises rates a little more, we might see something like the end of the 1990s again. But if the Fed has to really ramp up to fight inflation, it's going to be a much worse environment than investors realize.
The numbers were considerably more moderate than we and others had expected. We have gotten back to pre-hurricane numbers. (But), I don't view this as the beginning of a sustained downturn.
The idea that the Federal Reserve is close to being done with interest rate hikes has certainly benefited the bond market, and stocks have benefited as well.
Today's report should convince most market participants that the March softness in the data was primarily a one-month phenomenon. Sounds like a recipe for continued 25 basis-point rate hikes for the foreseeable future.
Not only will the market be surprised if we get to a 4.25 funds rate at the end of year, but 4.25 is by no means going to be the end. You're going to see a significant backup in yields to reflect that.
The relatively moderate figures for current conditions should be weighed to some degree against robust expectations for the six-month outlook.
There is sufficient upbeat news on the economy to convince the FOMC to tighten. If the economy warrants a rate hike, the Fed would be doing a great service by delivering.
What stock investors probably need to be thinking about now is 'what are profit margins doing?'. A little inflation wouldn't be so bad for the stock market, for Corporate America, but it wouldn't be good for the economy or the consumer.
The case for continued rate hikes has become, if anything, more compelling since Katrina.
We still do not look for the core CPI to accelerate rapidly, but it is likely to be persistently firmer going forward. At a minimum, core consumer price inflation will be firm enough to keep the Fed on edge and raising interest rates.
While housing demand will probably continue to moderate from the torrid pace seen in the last few years, housing starts should remain well-supported in the coming months, as builders' backlogs remain near record levels and rebuilding along the Gulf Coast will eventually boost activity.
The economy is clearly advancing nicely right now and it will in our view take more than a 5% funds rate to slow it down.