If you’re wondering just how much of the financial conditions tightening impulse seen from late-July through October was reversed by this month’s dramatic decline in US yields, higher stock prices and a weaker dollar, the answer is a lot.

As summarized here on Tuesday afternoon following the soft October CPI report, the enormous drop in five-year yields, the dollar’s worst session in a year and the raucous equity rally were all conducive to easier financial conditions.

A quick check on Goldman’s US FCI index reveals the largest single-session easing impulse in a year.

“Locally, this impulse easing in FCI will keep the Fed stuck on the hamster wheel of needing to talk a big game on maintaining further tightening optionality, at least until the hard slowdown makes cuts an actual option which they cannot yet acknowledge,” Nomura’s Charlie McElligott said Wednesday.

As the figure below shows, the Goldman gauge has now unwound around half of the very FCI tightening the Powell Fed cited in suggesting another rate hike may not be necessary after all.

That’s counterproductive. Note also that the bond rally which followed the CPI report will engender an outsized drop in mortgage rates.

“The Fed wants to be on hold (or potentially cutting) if it can and believes overtightening risk is relatively high [so they] will reverse engineer ways to justify this position unless markets force their hand,” Nomura’s Jonathan Cohn said, before quickly noting that the Fed “won’t take hikes off the table until a slowdown is abundantly clear, thereby reducing FCI-driven reacceleration fear.”

That’s Powell’s balancing act. As Cohn put it, he (Powell) has to keep two-way policy risk in play, but the credibility of the Committee’s contention that additional rate increases are on the table is challenged by the market’s knowledge that they’d probably prefer not to hike again. I discussed that dynamic at length in the latest Weekly.

As Cohn went on to say, the Fed looks poised to lean on the idea that rate cuts could be appropriate even with core inflation still above target in order to ensure that moderating price pressures don’t mechanically tighten financial conditions — if inflation recedes and the policy rate is static, real rates are higher.

“Cutting to keep the real policy rate from increasing could be construed as policy neutral in this framework and is the only way to square the circle of projecting cuts amid well-above target inflation and projecting QT to continue alongside cuts,” Cohn went on. “Currently, the ~100bps of cuts priced by YE24 is somewhere between insurance and a proper cutting regime — an uneasy and unlikely median between two modal outcomes.”