If the Fed was nervous about the prospect of easier financial conditions in the face of softer macro data, their consternation level was perhaps higher on the heels of Tuesday’s benign CPI report.

To be clear, they may not be nervous. The inflation update was an unequivocally constructive development, and cooler-than-expected reads on both core and supercore doubtlessly take precedence over the potentially counterproductive reaction across markets.

Still, I’d be remiss not to note that Tuesday’s price action constituted a powerful FCI easing impulse. The dollar, for example, fell the most in a year.

On several occasions this month, I suggested November 2023 is shaping up to be a repeat of November 2022, when a soft October CPI report triggered an abrupt about-face for the dollar, a sharp rally in Treasurys and a rebound for beleaguered equities. Tuesday underscored the point.

The parallel was evident in rates too. Five-year yields dropped almost 25bps on Tuesday.

Excluding the volatility around SVB’s collapse, that was the largest single-session decline since the October 2022 CPI report.

Note that according to Mortgage Daily News, the 30-year fixed dropped 18bps on Tuesday. That would be on top of the recent large drop precipitated by the decline in yields seen earlier this month.

All of this serves to negate a portion of the FCI tightening impulse witnessed from late-July through the end of last month. That tightening impulse was part and parcel of the Fed’s rationale for skipping a hike at the November meeting and also for their readily apparent inclination to hold off on another increase altogether.

One reader asked Tuesday whether the CPI report was good enough news to justify a 5% rally for small-caps. The answer was (obviously) no.

However, the dramatic decline in the dollar and the huge drop in yields were rocket fuel, and it’s no surprise that the last time the Russell 2000 rose as much as it did during Tuesday’s session was — you guessed it — on the day the October 2022 CPI report was released.

Now remind me: What year is this again?

Bottom line: The Committee’s FCI reflexivity is biting them again, although, as noted above, policymakers’ elation at the favorable inflation report surely outweighs any consternation about the FCI read-through of the attendant market rally. For now.