Last week, Jay Powell told you that the Fed intends to cut interest rates next year, not because the
I Got You Fam
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So the total wealth of the nation continues to grow at a rate that outpaces GDP and the reckoning is forestalled…but for how long?
Lower rates mean Treasuries can go back to paying very little, which is great for a government addicted to spending borrowed money. Reducing the national debt—and reigning in spending—is forestalled…but for how long?
Are the Boomers adding a few more minutes to the clock that governs the ticking time bomb and hoping they’re in the grave before this all goes off?
So I’ve read the transcript a few times and I don’t see the dovishness, I do see a decided lack of hawkishness but that’s about it. Now to be clear, what I see doesn’t matter one iota, the market liked what it heard and has ripped higher. The common knowledge is now a dovish pivot.
That said, sometimes I struggle with a bit of chicken/egg when it comes to narrative. For example, is. the narrative driving the market or is hard to explain market action creating a narrative for us simpletons to understand? Figuring out which is which can be a big challenge! Remember when we were told tech stocks were richly valued because rates were so low? I haven’t heard too much about that lately…
Pretty much since the hiking cycle began, whenever the market would get ahead of itself pricing rate cuts JP would use his press conferences to kill the idea. This was a well known and well hedged event. When that hawkishness didn’t materialize and all the puts that had been bought were sold or expired, the dealers would’ve been mechanical buyers of SPX in order to unwind their own hedges from selling the options in the first place.
What’s CNBC gonna run with, a complex market structure story or “dovish pivot!”? Obviously dovish pivot checks all the boxes. We’ve had a few fed speakers come out since pushing back on the rate cuts narrative and so I’m left wondering what JPs true communication attempt was, whether he botched it and how he proceeds from here.
Curious to hear how other people are thinking about this.
I said—in multiple settings, maybe even here at some point—that the Fed was going to have to do one of two things: either hammer the economy into the ground OR find a way to pretend that their 2% inflation target was always fluid and that well akshually 3.2% (or whatever they land on) is close enough. I always assumed that option #2 would too badly damage their credibility (lol) and thus figured option #1 was the only way out. I was very very wrong.
I think Jay Powell is intelligent and experienced in markets.
I think he has intentionally chosen to prioritize growth over Inflation with his control over Monetary Policy.
I think the subsequent backtracking by his minions at the Fed was an attempt to limit the risk of out- of -control -markets and also preserve the image of the Fed as prudent Monetary Mavens.
I also think by making this choice he has once again chosen to reward the wealthy (stimulating financial asset prices, housing prices, etc) at the expense of Middle Class (the ones most harmed by inflation in goods and services)
So for people who don’t understand why, the vast majority of what used to be called the “Blue Collar, Lower Middle Class”, are enthralled by Donald Trump, this choice by a prominent member of the Elite, is a reason why (even though this group doesn’t understand monetary policy, they will feel the results in 2024)
They just want someone, anyone who will speak for them (even though Trump is a ridiculous choice to do so)
So would buying Treasurys while rates are still high (“ish”) be considered “tough love”?
The Fed already did this when they announced the move to Average Inflation Targeting a few years back. I remember being surprised at how little everyone seemed to care about such a significant change.
Could not agree more!
I think that’s exactly it. This is the Last Hurrah.
Powell never says that he’s gonna cut. That’s in the dot plots. What he said is that the Fed is available to cut. He’s saying that the Fed has Mr. Market’s back, which many (me included) were doubting.
As I have watched the past month and a half unfold, two old ET notes keep swirling around my head.
“The Long Now part 1” and “What we need to be true”
The first thought has to do with the punchbowl that Ben and DY are talking about. When does the bill for this party come due? How much demand can we pull from the future into the now? Valuations in every asset class except Fixed Income are stretched by any measure. We have stolen - yes stolen - 25 trillion from the future since the financial crisis.
I think the FED see’s the markets getting ready to call bullshit on the whole house of cards , hence the dramatic recent pivot in the jawboning. This brings me to the next ET note.
What we need to be True - with interest rates across the curve at 5% the math simply does not work. The longer they stay high the more debt rolls over at the much higher rates-- 50X higher in some cases than the rates the maturing bonds were originally issued. Interest on the federal debt is now so immense that it’s consuming 40% of all personal income taxes. The largest source of revenue for the federal government is increasingly being devoted to just servicing the debt, not even paying it down. A few more years with rates at these levels and adding 2 trillion per year and the party will be over. Massive tax increases and austerity level reductions in services will be the only options left on the table.
I agree with DY and Ben:
Lisa Shallett of MS introduced in a recent call that maybe the FED is seeing signs of instability under the surface that the public has yet to see, and maybe that was the genesis of the pivot.
The market celebrating this move down in rates, but at some point soon, I suspect they will not be seen as a positive.