Fed nailed it | Financial Times


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Welcome back.One of the difficulties of this job is that sometimes it feels like everything U.S. Federal Reserve. In the days of the Fed meeting, at least you can admit it.

Do you think my reading of the Fed’s actions is wrong? Email me: [email protected]

The Fed is doing well

The work of the U.S. Central Bank is now terrible. Inflation is above the target, employment is below the target, and asset prices are very high. Regardless of their concerns about setting the right monetary policy to optimize employment and prices, the collapse in the value of stocks, bonds, and real estate is the third serious risk facing the US economy.

If the Fed tightens policy quickly because of concerns about inflation, policymakers may undermine asset prices, which may stifle economic momentum. If they are more concerned about employment and let inflation ramp up, they may cause an asset bubble to inflate, which will surely burst in the future, resulting in a recession like 2001 or 2008. Is not fun.

At the Federal Open Market Committee meeting held this week, financial markets expect the Fed to absolutely maintain this balance-betting that inflation will subside and win. It seems that interest rates will only increase a little bit for a long time, economic growth will remain healthy, asset prices will rise moderately, and the kingdom will be peaceful, Amen.

Several indicators of the market’s confidence in the Fed’s precision and good luck:

  • Although the stock index has been trading sideways in a wide range for two months, it has been trading sideways near the historical highs of prices and valuations;

  • Bond yields (a recognized imperfect indicator) did not respond to hot inflation data;

  • The rise in bank stocks, perhaps the company most related to rising inflation and interest rates, has peaked;

  • In the past month or so, the market’s expectation of the inflation rate for the year 2026-31 (“five-year five-year”) seems to be stable at around 2.25%. Fed data:

  • Over the past few months, the market’s expectations for the timing and frequency of interest rate hikes have become more and more moderate. Morgan Stanley’s chart:

  • Vix is ??a measure of expected volatility derived from the options market, and it continues to hit post-pandemic lows:

A report from UBS Global Wealth Management Company Mark Haefele a few weeks ago perfectly summarized the market sentiment:

“As the Fed handles any policy transition carefully, we believe that with accelerating earnings and economic growth, global stock markets should continue to gain support in the next round of gains.”

Boy, that sounds great.

In order to maintain these expectations, while maintaining their credibility by proving that they take inflation data seriously, Jay Powell and his happy band must convey the message correctly. It looks like they did it.

Yesterday’s language statement Almost from April, Except for some nonsense about where we were infected with the virus. The policy and the official outlook for future policies have not changed.

The dot chart shows the expectations of individual FOMC members on the direction of monetary policy, moving upward in 2022 and 2023:

The significance is that the average committee member’s expectation is to raise interest rates twice in 2023, exceeding expectations. The committee’s average core inflation expectation this year has also risen sharply, from 2% to 3%, which also seems to be hawkish.

So has the Fed changed its position? Are you hawkish now? In a press conference after the two-day FOMC meeting, Powell stated that the Fed is “talking about” reducing the scale of asset purchases, but emphasized that it has not actually been talked about yet. He downplayed the importance of a point:

These are of course personal forecasts. They are not committee forecasts or plans. We did not actually discuss whether it is appropriate to lift off in any particular year. Because it is too early to discuss lift-off, it does not make any sense. .. These points are not a good predictor of future interest rate changes, that is because its uncertainty is very high, there is no good predictor of future interest rates, so [the] The point must be shot with a large grain of salt.

This threaded the needle. The dot plot and average inflation expectations show that committee members are not blind. They see the data and adjust their expectations. But the statement and Powell’s comments tell you that, as a whole, they insisted on their bets. Inflation seems to be temporary, and monetary policy does not need to be changed for a period of time in the foreseeable future.

The initial reactions of experts and the market were somewhat erratic. The Standard & Poor’s 500 Index fell 1%. Yields on five-year Treasury bonds jumped. Before the press conference, Aberdeen Standards economist James McCann summed up his mood at the time:

This is not what the market expected. The Fed is now signaling that interest rates will need to rise faster and faster, and their forecasts indicate that they will raise interest rates twice in 2023. This change in position is somewhat contradictory to the Fed’s recent claim that the recent surge in inflation is temporary. If the price fluctuations are temporary, then there is no obvious reason for them to raise interest rates earlier than planned, especially given the recent disappointment in the labor market.

But by the end of the day, at least the stock has Caught back Most of these losses. Tomorrow may bring a different consensus, but in my opinion, the Fed is doing well under high expectations and difficult economic conditions.

Although it may not be worth mentioning, my own guess is that the Fed will win the inflation bet for the simple reason that the price spikes I have seen are conditions that people expect to soar after the pandemic.So my argument is Wood price Yesterday (I find it interesting that Powell repeated it more or less on Wednesday). Timber is theoretically related to loose monetary and fiscal policies, through hot housing demand. However, a closer look at the specific supply and demand issues of wood shows how they are epidemic-specific, and, as you might expect, prices are now rising.

Considering market pricing and the upcoming fiscal stimulus and money supply deceleration, I am more worried about disappointing growth than inflation.

Am I confident in these guesses? Low, I hope FOMC feels the same way. As Powell said yesterday: “Forecasters have many things to be humble; this is a highly uncertain business.”

A good book

In “The New Yorker”, Comment on a new book Regarding the history of charts and graphs, there are many good examples of how the correct illustration distinguishes seeing the truth from missing the truth.

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