Following the March FOMC decision and Jerome Powell’s press conference, I was struck (again) by just how emotionally invested market participants, policy observers and even some strategists (albeit not those employed by serious institutions) seem to be in the monetary policy debate.
You expect caustic banter from finance-focused social media which, over the past decade, underwent an unfortunate metamorphosis from a community of people sharing charts to a veritable wellspring of conspiratorial rants, gold propaganda and bearish agitprop. But you don’t expect it from people writing in a professional capacity.
Granted, you come to know, over the years, what to expect in terms of tenor and cadence from the list of names on your daily market commentary reading list. Some people are deliberately abrasive, some are sarcastic by nature and so on. That’s (more than) fine. It’s actually why I read some of those folks. But since the onset of inflation in the developed world, it’s felt at times like a lot of ostensible professionals are genuinely aggrieved at technocrats — so, it’s not an act anymore.
It beggars belief that such people are just voicing Main Street frustrations given the self-evident notion that if you’re paid to write about monetary policy for a living (and particularly if you’re paid by a bank to do so), you don’t live on Main Street, or anywhere near it. So, when I peruse my inbox following FOMC meetings these days, I’m taken aback by the overtly aggressive tone adopted by virtually everyone who doesn’t write under a bulge bracket letterhead.
That’s unfortunate, to put it mildly. GSIB research is very useful, but it’s pretty homogenous by nature. If you’ve read BofA’s FOMC recap, you’ve generally read Barclays’ and so on. You do want to spice it up, otherwise you’ll die of boredom. But things are getting a little too spicy. Some of what I read on Thursday evening I couldn’t cite, because I was afraid some stodgy somebody somewhere might write in and complain.
Fortunately, BMO’s Ian Lyngen and Ben Jeffery are a safe harbor in the storm of derision — a bastion of sanity, accuracy, incisiveness and precision. Importantly, their commentary is also just differentiated enough that it’s not akin to reading “one more” GSIB recap.
In my judgment, Lyngen and Jeffery got the FOMC meeting and Powell’s presser exactly right on Wednesday afternoon, and delivered their assessment in a characteristically measured, academic way. Below are three (very) short excerpts from their longer take, which I wanted to present in the interest of suggesting that this is how FOMC coverage should be done, and plaudits to the two of them for the very solid effort.
Via BMO’s Ian Lyngen and Ben Jeffery
Powell followed through on the quarter-point hike that the market priced in, but this move could easily be the last for the current cycle. We don’t offer this observation lightly or without cause; the terminal rate projection was left unchanged at 5.1% (i.e. one final 25bps increase from here). This was in contrast to broad-based expectations for an increase to 5.4% or beyond. Recall that there were calls for a 6% terminal as recently as early-March – the macro narrative has quickly shifted, and the market now has a Fed pivot in hand. During the prepared remarks at Powell’s press conference, the chair highlighted that the forward language moderated the tone for future tightenings from “will be appropriate” to “may be appropriate.” In addition to the phrasing change itself, the fact that Powell went out of his way to emphasis the change even before the media questions began was a tone-setting event. Moreover, the observation was made early on during the press conference that a pause was considered – a clear dovish skew and a potential precursor for a one at the May meeting. If the Fed were forced to decide on May’s move today, it would be a pause. Fortunately for the FOMC, the next six weeks will offer greater clarity on the severity of the banking crisis.
The front-end of the US rates complex rallied >20bps as 2-year yields declined as far as 3.91%. 10s rallied as well; although to a lesser extent reaching 3.453% intraday. Assuming this is the beginning of the Fed pivot, it will also mark the commencement of the cyclical re-steepening of yield curve.
As the market continues to digest the Fed’s actions, it’s worth contemplating the degree to which future shifts to the balance sheet might eventually come into play. SOMA continues to runoff, and while this has been occurring as a background factor, there are a variety of influences that have resulted in the process being less disruptive to the broader financial system than it might have otherwise. First, the utilization of the discount window, FDIC injections and money flowing out of RRP have all functioned as an influx of reserves into the system. Second, the Treasury Department’s debt ceiling saga has limited bill issuance and led to a drawdown of the TGA – adding further liquidity into the system at a moment when the Fed’s actions were designed to accomplish the opposite. The next several quarters will be illuminating insofar as the eventual resolution of the debt-ceiling will free up the Treasury Department’s ability to scale up issuance and replenish the TGA – thereby reversing the offset to QT. Moreover, during the months when the TGA is being rebuilt, the QT flows will be exacerbated.
