Roger Ferguson, former vice chairman of the Federal Reserve and a director on the board of Alphabet (NASDAQ:GOOGL) since June 2016, joined CNBC’s ‘Squawk Box’ earlier Monday to discuss the Fed’s upcoming rate hike decision.
The last time Ferguson joined the show, he explained that he felt the current market rally is misinterpreting that the Fed will keep interest rates elevated until there are true signs of inflation slowing.
What Happened: As the November Fed meeting kicks off on Nov. 1 and Nov. 2, Ferguson thinks that we will not receive clarity about the Fed’s future direction.
He also mentioned that the odds of a 50 bps hike are slightly higher than another 75 bps hike, although Ferguson thinks the Fed should tighten by 75 bps.
For the Dec. 13 to Dec. 14 Fed meeting, Ferguson believes the Fed is keeping the 75 bps benchmark as an option, and he is expecting the Fed to hike rates by 25 bps in the first two meetings of 2023.
The Market Disconnect: Ferguson reported that the market is forward-looking and has built-in optimism which is disconnected from the fed's commitment of achieving a target inflation of 2%.
The market has been looking for signs of peak inflation and pivot language, but is losing track of the big picture: Inflation is too high for the Fed.
Furthermore, the labor market is too tight and survey data suggest CEOs plan to raise wages for a period of time, Ferguson explained.
According to Bank of America (NYSE:BAC), fewer people are living ‘paycheck to paycheck’ as payroll payments in customer accounts increased by 5.5% per household, while total card spending grew by 4.4% per household in the year to September.
Therefore, this is the market disconnect Ferguson speaks of as the Fed will keep interest rates elevated for longer than the market expects as the consumer is holding up fairly well.
Ferguson commented that the market disconnect “is a bit of a head-scratcher,” since the market is overlooking the data and is making the “Fed’s job harder.”
In the future December meeting, Ferguson reported that the Fed Dot Plot’s internal rate will be much higher than 4.6%, and would not be surprised if rates are raised to 5% to 5.25% to stabilize inflation, which is not a probability built into the market.
Also Read: Dow Gains 11% On This Day In 2008 On Interest Rate Cut Optimism
The Last Word: Ferguson was surprised that the Dow Jones was up over 13% for the month as it is not a reflection of the Fed policy, although earnings have been reasonably good with pockets of disappointing earnings as some large firms are sensitive to the macro economy like Apple (NASDAQ:AAPL).
Ferguson was shocked at the strength of the markets in October and does not think that it “reflects what’s likely to happen in interest rates going forward, maybe for the next year or so, before the Fed actually reduces rates.”
The next set of important data points to keep an eye on in the next six weeks includes inflation reports and labor market reports, according to Ferguson.
