I’m trying for brevity today, as I have been busy attending this year’s Options Industry Conference as a speaker. It also meant that I couldn’t pay as careful attention as usual to Chair Powell’s speech and the trading that ensued. But there was much that was notable despite the lack of rate movement.
I was asked for an instant reaction to the FOMC statement and came up with this:
Pulling back on QT [quantitative tightening] is the noteworthy aspect, particularly because cutback is strictly on the Treasuries side while agencies and mortgages remain unchanged. A bit of dovishness to balance the acknowledgement of lack of progress on inflation.
A fellow attendee raised the question about whether the reduction in QT was in fact a bit of QE (quantitative easing). I disagreed, because a less restrictive policy does not mean that we have flipped to something accommodative. Yet I found another attendee’s question about whether the reduced QT meant that the Fed could engage in yield curve control to be oddly compelling. It is indeed quite possible, if not likely, that the Fed can be selective about where it reinvests the proceeds of maturing bonds, thus subtly influencing the shape of the yield curve.
As I did my best to follow along with Powell’s press conference, I noticed the usual Goldilocks tone which seemed to mollify nervous traders. But rather than suffice with a modest rally when he acknowledged that hikes were not likely, the 1%+ move seemed excessive. And it was. It was obvious that the usual crop of speculators who seem to chase every decent rally found no one to sell to when they tried to close out their day trades. So down we went. I commented:
I was more puzzled trying to figure out what Powell said to make stocks rally so sharply. Sure, he said no hikes are necessary and downplayed fears about stagflation, but that wasn’t worth a big speculative rally.
The head fake troubles me, and could indicate the changing trading environment that we referred to recently. It may be time to be more assiduous about selling rallies rather than buying dips – and certainly not chasing rallies on flimsy rationales.
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I interpreted Powell’s comment, to the effect that any funds resulting from MBS roll offs would be reinvested in treasuries, as a move toward mollifying credit markets . Sort of an under the table QE
My thought was Powell is dumping the toxic MBS before the bottom falls out. Maybe a repeat of 2008…sell high buy low.
Everyone seems to have missed his comment that tapering QT wouldn’t necessarily reduce the size of the total BS reduction – ie QT is going to last longer, albeit at smaller monthly amounts.
it’s called a top, or at least the reaction to the previous top and is unlikely to be overturned by a return to the so-called bull market “rally”
Thanks
Thanks for engaging!
Well written. Thanks.
Thanks for engaging!
Would like to see some discussion of the INFLATION TARGET. My data sense tells me that when inflation rates are too high for too long (especially after a long period of little to no inflation) you aim for maybe 3% versus the Fed’s 2% target inflation rate, due mainly to lag effect of data measurement, and the realities of the new economy – higher wages and inflationary private/public initiatives. This way the Fed does not overshoot to the detriment of the new US economy.