Good morning contrarians! It is Wednesday, Nov. 2. Fed Day.
State of Play
As of 0615 all is quiet ahead of the Fed:
Stock futures are flat, with major US indexes not moving much from their break-even point;
Bonds are seeing a few bids at the short end of the curve, with the yield on the 2-year down 2 basis points to 4.52%, which is still higher than it was yesterday. The 10-year is flat at 4.05%;
Commodities aren’t doing much, though natural gas futures are up 4%, continuing a choppy ride for that security;
Cryptos are down a bit, with Bitcoin off about 1% to trade around $20,400.
FOMC
Today is the conclusion of the two-day Federal Open Market Committee meeting. The Fed interest rate decision will be announced at 1400 with the press conference featuring Jerome Powell following at 1430. The expectation is for another 75bps rate hike, to bring the Fed’s target rate to an even 4%. At last look Fed Fund Futures were pricing in an 87% chance of that happening.
That means we probably will get 75bps. The focus will then turn to the policy statement and Jay Powell’s presser for clues of a ‘pivot’ away from aggressive rate hikes at future meetings. The market appears to be pricing this in based on its trajectory the last couple of weeks. But we don’t actually have all that much in the way of actual clues. The closest thing is probably a statement attributed to San Francisco Fed President Mary Daly that “the time is now to start planning for stepping down.” It’s true that other Fed officials have expressed caution about further rate hikes, but this came from dovish members of the FOMC.
One would think that Jay Powell’s words might carry more weight. Look at what he said in his now infamous Jackson Hole address back in August:
Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.
Data Points
Okay, so that was back in August and new information has become available since then, which might get him to back away from this stance, right?
Not so fast. Yes, new information has become available but absolutely none of it is pointing to ‘below trend growth’: labor markets in the US are still showing near full employment. Pain to households and businesses? Where? Companies have been raising their outlooks. Consumers are flush with cash and spending it on things they don’t need. Most crucially, if you look at the actual inflation data, it is hardly showing signs of cooling. Prices are continuing to rise across the board.
Is this really an environment where the Fed can start talking about normalizing policy? At Jackson Hole Jay Powell was very clear about the Fed’s mission where price stability is concerned:
Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.
The Bottom Line©
So the Fed continues to be in a bind over all of this, but luckily we aren’t talking about having the Fed reverse course all at once at one meeting. Even the most bullish bulls aren’t naive enough to expect that.
To meet the conditions for a ‘pivot’ it looks like some talk of slowing the rate of interest rate hikes will suffice. To clarify: That doesn’t even mean definitive talk of a 50bps rate hike at the next meeting, which is in December. Just some language that references the likelihood of lesser rate hikes being ‘warranted.’
The Fed should know by now exactly how to signal that and give the market what it is looking for — without abandoning its hawkish rhetoric on inflation and price stability. What’s more difficult to see is what they can cite in the way of data to support this. As we’ve seen there is literally not a single data point that speaks to lower prices other than maybe gasoline and that is due to fiscal, not monetary policy. Perhaps housing, though even that sounds like a stretch.
The market probably won’t care about that. If it gets something resembling pivot language in the statement or in Powell’s presser then it will probably rally, at least for today. Eventually maybe the reality will set in that the Fed is still in a bind and still needs to raise rates, even if it is at a measured pace. Or maybe not. If investors want to bid up stocks investors will bid up stocks and there isn’t a single thing any of us can do about it — other than enjoy the ride.
Fed Day Arrives, With ‘Pivot’ Hopes in Full Effect