Fed will need to hike rates to tackle inflation, says Fmr. Trump Special Assistant Joe Lavorgna

Summary

Joe Lavorgna argues the Fed should have already raised rates to fight persistent inflation. He explains that a rate hike, framed as removing last year's insurance cuts, would lower long-term bond yields by reinforcing the Fed’s credibility. He expects the Fed to hike before year-end despite political considerations and upcoming data, and that such a hike would trigger a rally in long-duration Treasuries.

• Lavorgna believes the Fed made a mistake by not hiking in July and that a hike would have caused long-term yields to fall.
• A rate hike now would signal the Fed’s seriousness about inflation, lowering term premium and boosting long bonds.
• He expects the Fed to raise rates before the end of the year, with a hike likely in December if not September.
• Upcoming CPI and PPI data will influence the timing; a soft CPI could push the hike out to December.
• Core PCE is still running well over 3%, and PPI remains above 4%, indicating sticky inflation.
• Political sensitivity around midterms makes a rate hike just before the election difficult, reinforcing the December scenario.