Fed Policy Review: Taper, Dot Plot, Mandates, Balance Sheet, Wild Card


Finally, it seems, the wait is over. Finally, we think, more certainty, less guesswork. Maybe I or we are just placing too much at the feet of Fed Chairman Jerome Powell this Wednesday. Perhaps our less developed opinions are based on incomplete information because this “outgoing” FOMC itself is working with incomplete information. Perhaps the accommodation for an economy, let alone a labor market, now needs to be cautious in the face of rapidly accelerating consumer and producer prices. Maybe it’s out of necessity that there’s a rotation at the committee level, like who votes and who doesn’t, just to keep the policy moving at least every calendar year.

As you rip your noggin off that greasy pillow you’ve drooled over all night, the stock markets have spent two consecutive days under pressure, as trading volumes have risen, signaling at least some professional distribution (risk-off ) ahead of this expected increase in information about policy direction. However, it lasted more than two days. Markets are struggling to discover prices at universal outlets … as volatility has hit the areas of stocks, debt, currencies, cryptocurrencies and commodity prices. Markets were challenged over three weeks by a mix of higher inflation, declining liquidity expectations, simultaneous impacts of the still booming Delta variant crossed with the highly transmissible Omicron strain (at a minimum) .

High stock valuations and the flattening of the yield curve helped deflect support from the equities space as Raphael Bostic of Atlanta, Mary Daly of San Francisco, Charles Evans of Chicago and Tom Barkin of Richmond launched their last monetary policy impacting votes that day before stepping down from the committee for a few years. The Fed’s policy-making committee will ring in the New Year on Jan. 26, with these four regional district presidents replaced by Esther George of Kansas City, Loretta Mester of Cleveland, James Bullard of St. Louis and Boston, who is currently under the direction of an Interim President … Kenneth Montgomery.

Even in “normal times”, although no one I know remembers what exactly normal is, this exchange would be one that seems to be swapping a more accommodating group for another hawkish, which may be one of the reasons where markets have been moving aggressively toward accepting a harder Fed Pivot right now. Over time we have seen leaders like George and Mester prioritize inflationary concerns over those of the broader labor markets, while in the past we have also seen leaders like Evans, Daly and Bostic lean over more accommodatingly. Bullard has always been a wild card and, in my opinion, pragmatic. At least we know he’s doing his own thinking.

Now in the middle ring

Like children in the circus, we don’t know where to turn. So much to see, the plate spinners, the jugglers, the whole spectacle of dogs and ponies. The FOMC has a lot to do in December 2021 that will require some adjustments, or at least some commentary. If not addressed in the official statement or related documents for release, such as in the quarterly economic projections, the financial media will likely leave a few stones unturned as Jerome Powell walks through this afternoon’s press conference . What exactly should we who make a living from these markets be looking for, Sergeant? I’m glad you asked.

The cone…

On November 3, the FOMC announced that the central bank would slow the pace of its asset purchase program to $ 15B (UST $ 10B, $ 5B MBS) per month, from $ 120B ($ 80B UST, $ 40B MBS) that had been in place. Readers are well aware that while I had no problem with the Fed’s support for the federal government’s borrowing requirement, I had opposed continued mortgage-backed securities purchases for about a year now. because it was clear that these markets did not need to be artificially supported for some time. I also argued that the Fed should initiate this reduction by cutting back on MBS purchases in isolation before switching to Treasuries. Alas, this Fed has not read, or at least ignored the advice offered here at Market recognition.

The FOMC will step up the pace of the $ 15 billion-per-month drop on Wednesday. On November 30, Jerome Powell, in testimony to Congress, explained that the committee would consider concluding its asset purchase program “a few months earlier” than expected in order to be in a more flexible location at an earlier date. At the initial rate, the program would have ended in June. Most of us on Wall Street expect this afternoon’s statement to potentially double that pace for at least January, with “cautious” language in place to make room for a new pivot towards the rear if necessary.

The plot of points …

Although the FOMC’s quarterly economic projections – which in this case include everyone, not just voting members – have turned out to be less accurate than a monkey throwing darts into a room empty of space and light, traders are will focus here this afternoon. Keep in mind that these projections haven’t been updated since September 22, so they’re pretty darn out of date.

While we are of course looking at the projections for real GDP, unemployment, and overall and core PCE, what will first catch the attention of investors will be the median, central tendency, and range of the fed funds rate projections. . In September, the median expectation fell from 0.1% in 2021 to 0.3% for 2022, as nine of 18 points showed no increase for 2022, six showed a rate hike and three expected to see two rate hikes. (Note: I’m assuming here that a rate hike equates to a 25 basis point move. Of course, the moves aren’t just limited to 25 basis point increments, that’s exactly how it went. made for decades.)

In September, the median then rose to 1% in 2023 and to 1.8% in 2024. Members’ aggressiveness towards monetary policy developments over the next three years may not be accurate and cannot explain the unknowable. That said, these points will certainly have an impact on the high-speed, algorithmic function of price discovery in financial markets. This, we also know, forces overtaking, even if by circumstance and not (cough, cough) by conception.

Double mandate …

You’ve heard it at least a million times since you were young, or maybe just since the cows came home, since if you’re my age it’s newer. The US central bank, the Federal Reserve Bank, operates under a dual mandate. The Fed must seek “price stability” as well as “a maximum of sustainable jobs”. Everything the Fed does or is asked to do is really not its job, and that is not why it exists.

Now, has the Fed hit its long-standing 2% inflation target? Sure. Are prices at this acceleration rate now stable? Of course not. Is the nation functioning at full employment? Difficult question. While labor markets seem, at least at this price level, to have reached a dead end between demand and supply, one could argue that with the official unemployment rate (U-3) at 4.2% and underemployment (U-6) at 7.8%, and with the BLS showing 6.877 million unemployed in November (household survey) against 11.03 million job offers in October (JOLT), we might argue that labor markets are close.

Having said that, there is “full employment of the labor market” and there is “full employment of the economy”, which are two very different things. I don’t think a sensitive being, even with the Atlanta Fed’s GDPNow model showing 8.7% growth in the fourth quarter (q / q, SAAR) could argue that this economy with all its lines of business limited supply and delayed deliveries, is fully utilized.

The Fed will have to address this obvious pivot from one mandate (maximum sustainable employment) to another (price stability) and will have to express some details on the level of commitment required in the future.

The results …

A decision will have to be made, maybe not today, but at least by the time the taper ends. Hopefully a young go-getter (that’s your clue, because I know you’re reading) will ask the Fed chairman what he (they) intend to do with the maturing securities? As of last week, the balance sheet held more than $ 8,664 million in assets, compared to a semi-recent pre-pandemic (September 2019) low of $ 3.679 million and a pre-financial crisis (2009) low of less than $ 1 million. . That’s nearly $ 5,000,000 in assets that wouldn’t be here without the pandemic.

Is the Fed allowing the balance sheet to wilt, which would have a negative impact on the monetary base and in theory exert a downward force on inflation? Is the Fed renewing or reinvesting the proceeds as a way to maintain current levels of liquidity in a way “under the radar”? This is quite important, and probably something overlooked by many of those reporting this news. It also has an impact, if not the actual pace of the transaction, the expression of the speed of money as a ratio, so it’s a big stick.

Generic character

As always, the virus remains in charge. The spread and severity of the various strains of SARS-CoV-2 currently in circulation and the ability of available vaccines and therapeutics to stem the associated human suffering and subsequently the economic consequences will slow and may slow the activity, delaying the results. monetary and fiscal policy trajectories. .

The often overlooked economic consequences are the needs of two-income households forced to make do with the income provided by a single producer as schools open and close regularly, then there was the slowdown in household formation and smallholder development. companies themselves. Very, very far from home. They say Wednesday’s child is full of misfortunes. Probably should have organized this clamake on a Tuesday.

Economy (All Eastern hours)

8:30 a.m. – Retail sales (November): Expecting 0.8% m / m, last 1.7% m / m.

8:30 am – Basic Retail Sales (November): Waiting 0.9% m / m, Last 1.7% m / m.

8:30 a.m. – Import price (November): Waiting 0.7% m / m, last 1.2% m / m.

8:30 a.m. – Export price (November): Waiting 0.6% m / m, Last 1.5% m / m.

8:30 a.m. – Empire State Manufacturing Index (December): Waiting 26.1, last 30.9.

10:00 am – Business inventories (oct.): Expecting 1.0% m / m, Last 0.7% m / m.

10:00 am – NAHB Housing Market Index (December): Waiting 84, last 83.

10:30 am – Oil inventories (weekly): Last -240K.

10:30 am – Gasoline stocks (weekly): Last + 3.882M.

4:00 p.m. – Long-term net ICT flows (October): Last $ 26.3 billion.

The Fed (All Eastern hours)

2:00 p.m. – FOMC political decision.

2:00 p.m. – FOMC Economic Projections.

2:30 p.m. – FOMC press conference.

Highlights of today’s earnings (Consensus expectations for BPA)

Before opening: (TTC) (.81)

After closing: (HEI) (.58), (LEN) (4.16), (NDSN) (2.10)

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