I'm starting to see the latest comments and leaks out of the ECB as a sign of things to come. They're taking a premature victory lap on last week's 50 bps hike and saying that banks are fine and the economy needs more rate hikes.
The thing to keep in mind is that groupthink at central banks is an ongoing disaster and so whatever the ECB is thinking, there's no doubt that the same sentiment has run through the Federal Reserve building this week.
At the moment, the banking crisis has ebbed and the FOMC may be thinking about the UK pension crisis that felled Liz Truss then was quickly forgotten. It led to the Bank of England slowing down on hikes and just today we got an upside UK inflation surprise.
Rather than a crisis, the Fed may be starting to see this as an opportunity to slay inflation once and for all. I'm reminded of recent words from WSJ Fedwatcher Nick Timiraos:
The Fed is saying they want to get growth slow down, they need to see demand slow down. If it looks like the plane is reaccelerating here and isn't going to touch the landing strip, then they're going to throttle the economy more with interest rate increases to bring the plane down. To me, a no landing scenario isn't really an option for the Fed; a 'no landing' is a delayed landing and then you're going to have the debate on whether it's soft or hard. The longer inflation stays high, the bigger problem it is for the Fed.
I wouldn't expect Powell to come out guns-a-blazin' today but if the dots stay high and the market handles it with some degree of poise, then expect the Fed hawks to start testing the waters in short order.
