Yeah so on Sunday, we said the following about the obsession over the Fed’s “hawkish hike” and the rancorous debate over what it means in the context of a growing deflationary impulse in the US:
The market’s fascination with the possibility that the Fed just committed a “policy error” has quickly morphed into a veritable obsession.
And it’s weird because it’s not like it wasn’t readily apparent prior to Wednesday that inflation was tepid and that the Fed was going to pull the trigger anyway.
Even if Wednesday’s CPI print hadn’t come in soft, there still would have been questions about whether inflation had truly turned a corner and virtually no one thought the Fed was going to lose its nerve and not hike.
So do we really know anything now that we didn’t know on Tuesday?
The answer, of course, is “no, we don’t.”
Still, it is worth asking whether policymakers did the right thing to lean against excessively loose financial conditions at the possible risk of exacerbating disinflation.
But that kind of thing risks arguing both sides of the coin. That is, it’s the same people screaming at the Fed to prick bubbles that are also screaming at the Fed to not hike because of a lackluster CPI print. You’d forgive the committee for throwing up its hands. Damned if they do, damned if they don’t.
Well, anyway, one person who is “getting increasingly grouchy” about this is SocGen’s Kit Juckes, whose morning take can be found below…
I’m getting increasingly grouchy whenever anyone says that last week’s FOMC outcome was a ‘hawkish hike’. Any day now, I’ll start denying that it was actually a hike at all. Rates went up, of course, but since the groundwork for that move started months ago, it was really only confirmation of something that had effectively happened already.
And while we got more detail about the Fed’s plans to run down its balance sheet, these amount to a pace so slow that they’ll still have boatloads of bonds on board when the next recession strikes. My guess is they’ll be buying again long before they finish normalising the balance sheet (whatever that really means). The ‘dot plot’ was unchanged after accounting for personnel changes, and while it implies more/faster rate hikes than the market expects, Chair Yellen did nothing to persuade the market to take the dots seriously in her press conference.
The market reaction has the level of rates two years down the road almost exactly where it was before the Fed hiked, and risk assets around the world are rallying again as the ‘carry party’ resumes.