Investors sleuthing for clues about what the Federal Reserve will decide during its December policy meeting got quite a few this week. But those hints about the future of monetary policy point to an outcome they won't be very happy about.
What's happening: Federal Reserve officials made a series of speeches this week indicating that aggressive interest rate hikes to fight inflation would continue, souring investors' hopes for a forthcoming central bank policy shift.
On Thursday, St. Louis Federal Reserve President James Bullard said the central bank still has a lot of work to do before it brings inflation under control, sending the S&P 500 down more than 1% in early trading. It later pared losses.
Bullard, a voting member on the rate-setting Federal Open Market Committee (FOMC), said that the moves the Fed has made so far to fight inflation haven't been sufficient. "To attain a sufficiently restrictive level, the policy rate will need to be increased further," he said.
Those comments come a day after Kansas City Fed President Esther George, a voting member of the FOMC, said to The Wall Street Journal that she's "looking at a labor market that is so tight, I don't know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there."
San Francisco Fed President Mary Daly added on Wednesday that a pause in rate hikes was "off the table."
A numbers game: Fed officials should increase interest rates to somewhere between 5% and 7% to tamp inflation, Bullard said Thursday. Those numbers shocked investors, as they would require a series of significant and economically painful hikes which increase the chance of a hard landing.
The current interest rate sits between 3.75% and 4% and the median FOMC participant projected a peak funds rate of 4.5-4.75% in September. If those numbers hold steady, Fed members would only raise rates by another three-quarters of a percentage point.
But Fed Chair Powell said at the November meeting that the projections are likely to rise in December and if Bullard is correct, that means investors can expect another one to three percentage points in rate hikes.
Dreams of a pivot: October's softer-than-expected CPI and producer price reading bolstered investors' hopes that the Fed might ease its aggressive rate hikes and sent markets soaring to their best day since 2020 last week.
But messaging from Fed officials this week has brought Wall Street back down to earth.
That's because market rallies help to expand the economy, said Liz Ann Sonders, Managing Director and Chief Investment Strategist at Charles Schwab, which is the opposite of what the Fed is trying to do with its tightening policy. Fed officials could be attempting to do some "jawboning" via excessively hawkish speeches in order to bring markets down, she said.
The bottom line: Investors listen closely to Bullard's comments because he's known for having looser lips than other Fed officials, Peter Boockvar, chief investment officer of Bleakley Financial Group, wrote in a note Thursday. But his hawkish predictions may have been "overboard," especially since he won't be a voting member of the FOMC next year.
Still, Wall Street analysts are listening. Goldman Sachs raised its peak fed funds rate forecast on Thursday to 5-5.25%, up from 4.75-5%.
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