FAIT Accompli
Admittedly, I found it difficult to get totally behind the notion that the June FOMC marked some kind of watershed moment.
Jerome Powell certainly didn't describe it that way. In fact, he came pretty close to calling the dot plot useless, which it most assuredly is. It's impossible to forecast economic outcomes years into the future. Doing that and then extrapolating (from your forecasts) the appropriate price of money two and three years hence is mostly a waste of time. A diagram of those ext
Enjoyed that. Deep down I’m not sure if the Fed will actually get around to hiking by 2023, but this ‘pivot’ could easily drive a narrative shift that financial conditions will tighten over the ‘macro’ horizon, which might be enough to send the USD and 5yr real yields higher (at -150bps, they have a long way to go before they become problematic in my view).
I completely agree with you here. A central bank policymaker on the BOE once described monetary policy as an iterative process. He then fleshed out the fact that they make a decision, and then see what happens and then course correct. It looks like a reduction in asset purchases of UST bonds may start sometime in the next 6-12 months. That was tipped maybe a little by ending and unwinding the corporate bond and ETF purchase program by the end of this year. But the FOMC has a lot of flexibility here. If the economy is better than forecast they may start in December or January and probably reduce purchases faster. If it is worse, perhaps they wait for the sun to come out and then unwind at a much slower rate. As for lift-off from the zero bound- same thing. It is weather dependent. Maybe it happens in mid-2023, maybe a bit sooner or maybe later. The process is iterative. The Fed is going to be a price taker here and will react to current circumstances- that is the point of average inflation targeting. It is probably more important to try to figure out where fiscal policy is going and where the overall economy is going rather than go in circles about the FOMC.
It seemed to me that the Fed’s message was ‘our eyes and options are open’. They aren’t dismissing price increases, but don’t see excessive inflation. They aren’t ready to taper or raise, but are keeping both on the table for the outyears. They are going to wait and watch, but will give the markets ample notice of any moves. About as benign as one could want. Could be more benign, but you wouldn’t want that as the headlines would then be ‘Fed to let inflation run out of control.’