108 To 2

108 To 2

During last month's policy deliberations, "many" Fed officials voiced some concern around the risk of over-tightening. Considering the "constantly changing" macro environment, and the lagged nature of monetary policy's effects on the economy, policymakers worried they might inadvertently overdo it -- that the Committee "could tighten the stance of policy by more than necessary to restore price stability." That was one notable takeaway from the account of the July FOMC meeting, during which the
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8 thoughts on “108 To 2

  1. “What happens after that is anyone’s guess”.

    Isn’t that the point of being data driven? We don’t know enough stuff yet. Don’t know what inflation will print. Don’t know what the real impact of doubling QT will be in September. Don’t know a lot. So you trade what’s visible. The play by play commentary is both what makes your musings so incredibly enjoyable, but also just constantly reinforces that markets are making it up as we go along. Be careful out there!

  2. Minutes sound more dovish than post-presser comments. Also sounds like Powell’s presser comments were pretty faithful to the FOMC’s discussion.

    My impression is the Fed wants to get a bunch of hikes in quickly, hoist FF to what it considers restrictive (mid 3s?) before end 2022, then if inflation has settled into a moderating path, pause and see if the lagged effects of hikes, the growing effects of QT, and maybe a bit of luck on external forces, pull monthly core and headline inflation to the desired level. I do not get the sense the Fed is desperate to get 2022’s annual inflation to some arbitrary backwards-looking number.

    So suppose we enter 2023 with FF 3.50, 2 year high 3s, 10 yr low 3s (inverted 50+ bp).

    That’s not great for long duration assets (if discount rate has to add back the bp shed in July) but those still seem to me like pretty un-intimidating interest rates (historically speaking).

    1. hi jyl, agree with your “impression”.

      My best guess now is, if something breaks in 2023, lingering inflationary pressure would mean no rate cut (or at most one at 25 bps, effect of which likely only through sentiments channel), but potentially dial-down of QT to stabilize USTs. Or other new Fed facilities to ease the pain in the real economy, skipping the textbook interest rates channel.

      And the bigger question down the road: what will be the next policy innovation in a stagflation scenario (after QE, credits backstop, ECB’s NIRP, BOJ’s YCC, i vaguely recall there was also temporary overdraft at BOE)? Will there be meaningful evolution of MMT-informed Treasury-Fed “coordination” going forwards?

      If Pozsar/Blackrock, etc. are right about structurally higher inflation in the medium term ahead, 10yr UST yield may only have a few more dives to mid 2s during event/data shocks, before the “persistent inflation” camp goes mainstream and establishes yields uptrend in the years ahead.

        1. I wonder how much credibility hawkish comments like Bullard’s have, given the minutes

          “Bullard: Fed Still Needs to Lift Target Rate to 3.75%-4% by Year-End — WSJ”

  3. Energy seems like A if not THE monkey wrench here. If the rapid fall in energy prices is the basis for the flat MoM inflation print we may need other factors to take the baton going forward.

    Eia had an absurd inventory print today and last weeks gasoline print was eye opening as well.

    1. I sold a whole bunch of energy weight in the spring, but have been holding on to an above-benchmark weight through the summer. It seems like energy should be a play on a shallow-not-deep recession. That hasn’t been working, but the various inventory data keep me stubborn.

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