One Big Hall Of Mirrors

Remember: It’s all relative these days.

That’s applicable to pretty much everything, but especially to central bank forward guidance. Today’s “hawkishness” would count as overt dovishness as recently as January of 2020. Compared to pre-financial crisis policy (already irresponsible according to many central bank critics), current monetary policy both in the US and across the developed world would seem nothing short of ludicrous.

It’s with that in mind that a “hawkish” Richard Clarida undermined risk sentiment Wednesday by suggesting that — hold your breath — the “necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022.”

Not only that, this cruel sadist confirmed that the Fed might announce plans to scale back monthly asset purchases later this year.

Dropping the sarcasm, Clarida said two things: 1) it’s possible that liftoff could occur as “early” as Q1 2023, and 2) market participants are correct to expect a taper announcement at some point later this year.

In addition to being the furthest thing from “hawkish” on any traditional definition of the term, there was arguably nothing new in Clarida’s remarks. Generally speaking, Q1 2023 was seen as the most likely date for the first hike and the June SEP and dots confirmed that officials have taken note of inflation and incorporated that into their expectations for the rate path.

And while Jerome Powell and the dovish contingent have made it clear there’s a “ways to go” before a formal taper announcement (and that plenty of notice will be given), I don’t know of too many people who thought it was feasible to push the unveil into 2022. In fact, just last week I wrote that,

There’s a growing sense (indeed, it might even be the consensus), that a taper unveil won’t come until December — that the September meeting will be used to set the stage. I’d view that as an extremely dovish outcome given the June dot plot shift, the onset of the taper discussion and calls from some officials to begin tapering sooner rather than later.

Clarida also said that the economic rebound will be among the swiftest in five decades, hardly news.

If you like anecdotal evidence (and seemingly everyone does these days), note the figures (below) from the July vintage of BofA’s Global Fund Manager survey.

Again: There were no surprises on Wednesday.

But markets responded as if someone said something groundbreaking. Eurodollar futures, which had rallied earlier, reversed course, with traders pulling forward liftoff to March 2023 from June 2023 following the disappointing ADP report.

That this came on the heels of underwhelming labor market data spoke volumes about the futility of attempting to navigate markets when everything hinges on policy, and when policy is (nominally, at least) beholden to the data.

Obviously, Clarida can’t be expected to change his entire spiel in real-time based on something like a downside ADP surprise, but because Powell has been so keen to emphasize the link between labor market progress and the taper timeline, the market adjusts in real-time to the data.

What you end up with are knee-jerk reactions in all directions, as algorithms (of the organic and non-organic variety, to account for the idea that humans are really just algos too) attempt to price the policy implications of the data while simultaneously negotiating soundbites from policymakers. Those soundbites may or may not be congruous with the incoming numbers because, again, Clarida (to use Wednesday’s example) was addressing a webinar, not live-blogging ADP.

Complicating matters further was a record-high ISM services print and additional evidence that the myriad bottlenecks and supply chain disruptions contributing to price pressures across the world’s largest economy persisted in July.

Bloomberg’s Cameron Crise called it “a mixed bag of market stimuli.” That was pretty apt, if amusingly understated.

His colleague Edward Bolingbroke employed a more lively cadence. “Clarida sparks wild ride in Eurodollars,” he said. “First, rate hike expectations were pushed out to June 2023 in the aftermath of a shocking ADP miss [but] contracts across green-packs and further out then did a full 180, and more, after hawkish Clarida comments.”

This is a testament to the Fed’s addiction liability, but it also underscores the self-referential nature of it all. Markets are beholden to the Fed, which is beholden to the data, which means markets are beholden to the data too, but the Fed is also beholden to markets. It’s all one big hall of mirrors.