So, Powell and friends started talking
‘bout talking, and markets were rocking
Though they won’t stop buying
More bonds, they are trying
To exit QE, which is shocking
The question is how long they last
Ere haunted by all of their past
As Sartre made clear
No Exit is near
Be careful, the trouble is vast
Technically, I am out of the office today and tomorrow, but felt that I needed to quickly opine on yesterday’s FOMC meeting.
While the FOMC statement was virtually identical to the April statement, not really even mentioning the fact that inflation is running much hotter than they had obviously expected, the big news was the dot plot, where the median expectation changed to 0.50% of rate rises by the end of 2023. Previously, that rate was still expected to be 0.00%, so clearly at least some FOMC members have figured out that inflation is rising. Substantial further progress on their goal of maximum employment has not yet been made and remains “a way’s off.”
But the market focused on the dot plot as it is the first indication that tighter policy may be coming. In fact, in the press conference, Powell explicitly said that this was the meeting where they began to talk about talking about policy changes, so perhaps that tired phraseology will be discarded.
The bond market reacted in quite an interesting manner, as every maturity up to the 10-year saw yields rise, but the 30-year was unchanged on the day. The fact that the 30-year ignored all the fireworks implies that market opinions on growth and inflation have not really changed, just the timing of the eventual movement by the Fed has been altered. Stock prices sold off a bit, but not very hard, far less than 1.0%, but boy did precious metals get whacked, with gold down nearly 3% on the day and a further 1% this morning.
And finally, the dollar was the star of the markets, rallying against everyone of its major counterparts, with the biggest laggards the commodity focused currencies like NOK (-2.7%), SEK (-2.5%), MXN (-2.5%) and ZAR (-2.3%). But it was a universal rout. Markets had been getting shorter and shorter dollars as the narrative had been the rest of the world was catching up to the US and trusting that the Fed was no nearer raising rates now than in April. I’m guessing some of those opinions have changed.
However, my strong suspicion is that nothing really has changed and that the Fed is still a very long way from actually tapering, let alone raising rates. Ultimately, the biggest risk they face, at least the biggest risk they perceive, is that if they start to tighten and equity prices decline sharply, they will not be able to sit back and let that happen. They have well and truly painted themselves into a corner with No Exit. Thus far, the movement has been insignificant. But if it begins to build, just like the Powell Pivot on Boxing Day in 2018, the Fed will be back to promising unlimited liquidity forever. And the dollar, at that point will suffer greatly.
For those who are dollar sellers, take advantage of this movement. It may last a week or two but will not go on indefinitely. At least sell some!
Good luck, good weekend and stay safe