The Fed Is Hiking Into A Growth Slowdown | Weekly Roundup

The Fed delivered its first rate hike of the cycle unanimously, and Vincent said the meeting and Kevin Warsh’s press conference were more hawkish than he expected. The Fed’s projections left a third hike next year roughly as likely as stopping after two, while markets were pricing about four hikes by mid-next-year. October’s move was priced at only about a 50% chance, but one speaker argued it could be underpriced: persistent inflation and the long gap until December could prompt the Fed to tighten sooner.

The speakers saw signs of a steady, not yet catastrophic, growth slowdown that may take two to three months to show up in headline data. Vincent cited Treasury and tax-collection figures: personal-income growth had been about 10% early in the year, while withholding-collection growth had eased from roughly 6–7% to 4–5%. He expected growth to weaken further as confidence in avoiding recession spreads, but did not forecast a recession. Fed members had raised their GDP and neutral-rate expectations even as temporary supports—including tax refunds, Strategic Petroleum Reserve releases and tariff-related funds—could fade or cluster around the midterms.

One speaker estimated $300–$400 billion in “stealth midterm stimulus,” including about $100 billion from capex-related reductions in corporate income-tax collections. Roughly $200 billion, in that speaker’s estimate, flowed directly into corporate profits and helped support nearly double-digit growth in aggregate U.S. profits; that earnings boost could recede if the stimulus is not renewed next year. The broader outlook was described as stagflationary: inflation remains sticky while growth slows, with investment booms helping sustain activity. Vincent said real wage growth had been about 1.2% before the war in Iran and had since fallen, with roughly six months of negative real wage growth.

Vincent allowed that fear of AI-related job displacement could be limiting wage demands, leaving open the possibility that the inflation shock proves temporary and inflation moves back toward 2% after the war ends. He leaned toward a more negative outcome, arguing that delayed cost pass-through and a fading wealth effect may mean consumers are only now confronting sharply higher prices. Workers could eventually seek pay increases, spreading commodity-cost pressures into wages and services. Meanwhile, Fed support had diminished as RMPs fell from $40 billion a month to zero, and a more hawkish rate path pushed real rates higher across the curve. Speakers disagreed on whether the hikes were a policy mistake or a forced choice.

Higher rates and costs were already weighing on demand: the 10-year Treasury yield was around 5% again, distillate costs had risen, and speakers described housing as effectively dead, with mortgage rates near highs and few revival options without new programs or stimulus. One speaker recalled that the last comparable 10-year yield was followed about eight months later by panic rate cuts in fall 2024. They also questioned whether slowing AI capex could be offset elsewhere. Vincent sees Europe as a major macro theme, likening it to Japan around 2012: cheaper Chinese industrial exports and higher raw-material prices are squeezing Europe and Japan’s terms of trade and living standards.

Vincent said Japan’s tax collections are growing 6%, its primary budget is balanced, and net nominal debt-to-GDP has fallen from about 200% to 150%, despite the yen’s depreciation from roughly 80 to 165 per dollar. He contrasted that adjustment with France, where he put debt costs near 4% and nominal growth near zero, and cited estimates that pension obligations equal 500% of GDP on a net-present-value basis. He expects Europe’s adjustment to be less coordinated, with the French election in spring and then the German election potential steps toward a euro crisis. Speakers saw Europe as exposed by its energy policies and questioned how much room the ECB has to respond; one expected only one or two more hikes before tighter policy risks a severe setback.

Possible positions discussed included long yen versus euro, long U.S. dollar/short euro, and long Brazilian real/short euro, with one speaker saying the carry cost had narrowed. Another expected the dollar could strengthen in a slowdown, while remaining bullish on gold as countries raise rates into an energy shock. UK equities were proposed as a contrarian hedge: domestic-share allocations at UK private-sector defined-benefit pension funds had fallen from 50% to 5%, and the market was described as cheap, with exposure to energy, healthcare and financials. Vincent also described Canada as seeking to diversify beyond real estate through foreign-capital investment; he said bipartisan support for resource investment and fiscal capacity could enable a major capex push, though U.S. pressure could still drive Canada into a significant recession.