Walmart and the Fed

Markets fully expect a 75 bp hike at Wednesday’s FOMC, and a small chance of 100. We see a small chance of only 50 bp, and the likelihood that Powell will signal future hikes will be smaller. We reiterate our call for only 25 bp in September, possibly zero. Core inflation has peaked, and Walmart’s disappointing earnings show why: because with no growth now in the money supply – because there have been no stimulus programs for a year and a half – high gasoline and food prices cause consumers to cut back on other items, lowering their prices and keeping overall inflation in check. But that process is contractionary, and we now face the potential of falling into recession because of it. The dominant narrative is changing, exemplified by Warren’s public warning about the human cost of pursuing what Powell admits will be an ineffectual path to higher rates.