FOMC 2022/07/27 Interest rate hike ⇒ economic recession & inflation calming ⇒ rate cut

(From the FOMC statement) The FOMC has decided to raise the federal funds rate to 2.25-2.50%. It anticipates that further rate increases will be appropriate.

Chair Powell said at the post-meeting press conference that “as the stance of monetary policy tightens further, it is likely appropriate to slow the pace of increases.”

At this pace, the image is a September +0.50%, November +0.25%, and December +0.25%, with the year-end federal funds rate around 3.25-3.50%, but the market is

5-year Treasury yield: previous day 2.90% → after the FOMC 2.83%
2-year Treasury yield: previous day 3.06% → after the FOMC 2.98%

It seems that rate cuts will begin in the latter half of next year.

Stocks welcomed this, and price-earnings ratios rose.
Currencies weakened the dollar.

In short, rate hikes → economic slowdown and cooling of inflation → rate cuts.

Regarding the outlook for economic slowdown, one can see the Philadelphia Fed’s outlook (see previous article). The issue is whether inflation will ease. The market seems to think so.

The key to the future is whether the economic slowdown will bring inflation down.

“Even though economic activity is slowing, overall demand remains strong. Supply constraints are longer and larger than expected. Price pressures are clearly spreading across a wide range of goods and services. Recently, some commodity prices have fallen, but price increases in gasoline and food are being driven higher by oil prices tied to Russia’s invasion of Ukraine.
The labor market is extremely tight. The unemployment rate is at a multi-decade low, job openings are at a historic high, and wage growth is substantial. The average payrolls in the past three months rose by 375,000, slower than earlier this year but still solid. Labor demand is very strong, but supply is weak, and the labor participation rate has been nearly unchanged since January. A persistent strong labor market implies that aggregate demand remains sturdy.”FRB Chair’s remarks: “Persistent rate hikes are appropriate” — meeting minutes: Nikkei

From such remarks, the market reaction this time seems hard to affirm.

Is the market pricing in FF rate movements like during the 2006 housing bubble burst?
If so, this time would involve a collapse in housing prices and a stock market crash.
However, this time will likely not unfold in the same way.
Let’s think a little more.