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Today’s macro trend is unpredictability — exemplified by this afternoon’s Fed decision. Plus, for paid members, I preview upcoming guests on the podcast.
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THE RISING TIDE:
Markets Do The Talking
The Fed left interest rates untouched today. Economists expected the decision, while some investors saw a meaningful chance for a hike. But what the Fed will do as its next act — and when — is becoming harder to see.
First, a quick recap of the central bank’s decision, from the FT:
“The Federal Reserve has kept interest rates on hold for the fifth meeting in a row, defying pressure to lift borrowing costs as Donald Trump’s Iran war unleashes a fresh jolt of inflation.
Fed chief Kevin Warsh reiterated his pledge to tackle inflation following the meeting, insisting that the central bank would not “waver” in its mission to bring down price growth.
Warsh’s comments came after the Federal Open Market Committee warned of the risks emanating from the Middle East as it left its main rate within a 3.5-3.75 per cent range.
In a sign of growing concern among officials on the central bank’s policy-setting panel about inflation, three of the 12 voters — Lorie Logan of the Dallas Fed, Cleveland’s Beth Hammack and Minneapolis’s Neel Kashkari — called for a quarter-point rate rise.”
Warsh described the 9-3 vote as policymakers being engaged in a “good family fight.” But the trigger of that fight — concern that the Fed may be falling behind in taming inflation — is worrying investors.
The 30-year Treasury yield rose to above 5.2%, its highest level since 2007, during the press conference.
“The bond market vigilantes are saying, ‘If you really want us to believe your rhetoric, you’ve got to start acting,’” DoubleLine’s Jeffrey Gundlach told CNBC.
Interestingly, the macro environment may change anyway, without the Fed.
That’s because Warsh wants to move away from giving “forward guidance” on where rates will go, and he wants to say less about the “reaction function” — how the central bank might respond to changing economic conditions.
Also, he’s “content the market is doing some of the policymakers’ job for them,” Bloomberg’s Enda Curran writes.
🏁 The signal, from Bloomberg:
“Many, including [Fed Governor Christopher] Waller, have noted that Warsh has a legitimate argument when he says too much forward guidance can put policymakers in a bind by creating the impression they have committed to future interest-rate decisions. But in failing to reveal his reaction function, he may also be posing a serious risk.
Pricing in financial markets, especially key benchmarks like the 10-year Treasury note or the Secured Overnight Financing Rate, are based in part on how investors believe the central bank will behave over time.
If that understanding is sharp, market participants can plug in their own forecast for the economy and make a reasonable prediction of where rates might go. That, in turn, can help avoid volatility if the forecast proves roughly correct, and even shorten the time it takes for rate changes to influence the economy.”
▶ The play: Business leaders are always making decisions with imperfect information. Planning and forecasting may become tougher with less signaling from the Fed, but questions about how much cash a business needs or should remain in a bank does not require predictions of the next Fed decision, Cory Frank, CEO of FinOpti and Robora Financial, argues. The same philosophy should be true with the new environment as well.
“Do not confuse listening to markets with attempting to trade every movement in them,” he says.
“For a company, listening means benchmarking its results, observing how institutions are pricing liquidity and adjusting when its own circumstances or the available alternatives materially change.”
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