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How Credible Are The Fed’s Hawkish Dots?
US equities were poised to "defy the naysayers" while "looking through" the hawkish set of Fed dots which accompanied the Committee's decision to pause rate hikes in June, even as most officials eye a higher terminal rate.
While editorializing around the June FOMC and Jerome Powell's press conference, I suggested the dots could be a bluff -- a necessary precaution to avoid the appearance of a "dovish pause" in the face of an escalating stock rally and an apparent trough in housing.
There was a
A repeat Jackson Hole performance may not, probably will not, impress the markets, who were once afeared of the Fed’s bark but now figure they’ve taken the worst of the Fed’s bite and, hey, party on.
No-one thinks the Fed will raise rates from 5% by more 100’s of bps, or even by another 100 bp. No-one thinks the Fed will do a BoC and let its balance sheet freefall with maturities. No-one thinks the Fed will risk another wave of bank failures, or UE rising to where it normally goes in a downturn. Investors might believe the Fed would like to see asset prices tumble, but since the Fed won’t do the things that would cause that, who cares?
The new reality is: inflation may stay high or go down; there may be a soft landing or no landing; new bubbles may inflate or not – and the Fed will be largely a spectator, feebly casting for more data and wringing its febrile hands over whether it daren’t burn its last two 25 bp matches.
Basically, I think that until and unless the Fed does something that shocks, frightens, and really hurts investors, the Fed is no longer a major factor in the equity market, and maybe a diminishing factor in the bond market away from the very short end.
Which is a sea change. No adults! No rules! No bedtime! We’re either in “Peter Pan” or “Lord of the Flies” now.