Fed’s ‘Remarkable Turn’ Puts Big Red Circle Around March
"We're at a point in time where we need to adjust policy," Mary Daly said Friday, as the curtain closed on an inauspicious start to the new year for US equities, which struggled to digest the largest one-week rise in real yields since the tumultuous days of March 2020.
Markets surely aren't that surprised at the Fed's hawkish pivot. After all, sundry pundits spent the better part of Q4 shouting from the rooftops about the urgency inherent in scorching inflation prints and the Fed's developed ma
With 2Y/10Y spread only 90 bp, and 5Y/10Y spread only 27 bp, seems that if Fed is going to raise short end as quickly and aggressively as it now appears, it needs to rapidly and decisively drive the long end up.
Fed can’t take the risk of a nearly flat, flat, or inverted yield curve – upsets investors and banks too much. As far as I know, Fed’s only real tool for driving long rates is QE/QT. So why is it a surprise that QT is being pulled forward?
If 3-4 hikes, that’s +75-100 bp short rates, then figure Fed needs to drive +100 bp long rates. Typical forecast for 10Y is still only about 200 bp by end 2022, which is only about +50 bp from where it was at the start of the year and only +23 bp from today’s level.
Well put ; but there’s the question of whether you/the Fed truly think inflation is persistent.
It’s certainly lasted longer and ended up higher than expected. But will it or won’t it go down in 2H 2022? I think the Fed is still (rightly) concerned about engineering a recession…
Perhaps the goods part of the basket may ease, as consumers exhaust excess savings and supply chains de-bottleneck. The services part seems likely to stay hot, given wage and labor pressures. The housing part also seems likely to stay hot, reflecting rents, prices, and low financing costs.
I don’t have any better of a crystal ball on inflation than the average shoeshine boy. Worse, maybe – n for much of 2021 I was on “team transitory”, right there with the now derided Fed economists.
My guess, though, is that for the Fed, losing institutional control and credibility over inflation would be just as bad, or worse, than tipping the markets into correction and/or the economy into slow-growth.
They might feel their command of their tools is good enough to avoid an accidental bear market and/or outright recession if those aren’t actually necessary to slay inflation . . . and if those are necessary, sorry! but what Fed chair can acquiesce to 7% inflation on his watch?
No doubt the Fed would be delighted for inflation to spontaneously start a sharp slowdown, and would be happy to re-assess (and do a victory lap), but for now it seems like they are committed to the way of the hawk.
Got to agree with every point you make, including the fact that I too was “team transitory”… And kind of still am, for an expanded definition of “transitory”.
The labor/wage-retail/hospitality issue and housing market are interesting conundrum. I feel Omicron should weight on the first and rising interest rates should affect institutional investment flows in the second…
Abrupt Fed policy change will likely end up with market panic…commencing countdown…
It’s not exactly abrupt… They’ve been talking tough for a good long while.