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Expect a '75 bps hike,' as Powell zeroes in on inflation - Chance Finucane

Kitco News

(Kitco News) - As the Federal Reserve Open Market Committee meets today to raise interest rates, markets are betting on a 75 bps hike, and so is Oxbow Advisors, according to its CIO, Chance Finucane.

"We think Powell has been pretty consistent during the year, trying to focus solely on bringing down inflation," he told David Lin, Anchor and Producer at Kitco News. "[He's also] trying to catch short-term interest rates up to that core PCE inflation number, which is still slightly above 5 percent."

Although the Federal Reserve's target for annual inflation is 2 percent, Finucane said that it would take a while for it to return to that level.

"We expect inflation to decelerate, but that might mean that inflation is still at 7 to 8 percent this quarter, and might be 6 to 7 percent in the first quarter of next year," he claimed. "So it might take a bit longer, or a bit more effort… to get back to that 2 percent number."

Rate Hikes and Demand Destruction

Some analysts question whether the Fed can bring down inflation, since the Federal Funds Rate is still below the inflation rate, and supply-chain issues continue to afflict the economy.

Finucane said that the supply-side issues are particularly pronounced in energy markets.

"Oil and natural gas, and especially oil, have stayed up [in price] a bit more than the Fed and the government would expect, based on how much they've tried to raise interest rates," he said.

He also highlighted that during the high inflation of the 1970s and early 1980s, Fed Chairman Paul Volcker allowed the Fed's rate to rise to 20 percent, far above the current Fed Chairman Jerome Powell's rate hikes.

"Going up by nearly 400 basis points in a year is a pretty sizeable move, but we saw a larger tightening in policy during the Volcker era," said Finucane.

He added the oil prices could see further increases, due to increasing demand from China, or if the U.S. stopped releasing its strategic petroleum reserves.

"There's not enough new supply being generated," he said. "You might get some additional demand coming from China if they start opening up their economy a bit more… and then there's just a bit more demand every year for fossil fuels. All of those factors could lead to oil prices staying up a little longer."

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How High Will Rates Go?

The Fed will raise rates to 5 percent, provided nothing "breaks" in the financial system, said Finucane.

"If they can up to 5 percent without anything significantly breaking, they'll definitely try to get there," he said. "We saw some reports that they could get to five-and-a-half to six percent on the Fed Funds Rate, but we wouldn't expect that at this time."

He pointed to the fact that if the Fed Funds Rate becomes too high, then the government will struggle to pay interest payments on newly-issued debt.

To find out which assets Finucane thinks will perform the best in this environment, watch the video above.

Follow David Lin on Twitter: @davidlin_TV

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