Initial Calm After Fed Mtg. Followed by Another Tantrum
Initial Calm After Fed Mtg. Followed by Another Tantrum
On Wednesday the Fed concluded its’ March meeting. It seemed as if Federal Reserve Chairman Jay Powell really hit a homerun, particularly since financial media had been commenting on the distinct possibility that another bond rebellion would result from his comments. The release of the SEP, or ‘dot plot’ also showed governors mostly dutifully in line with his devotedly and familiar dovish message. He appeared to have successfully threaded the needle and markets settled nicely up on Wednesday in the wake of his comments. On Friday, Jay Powell released an op-ed in the WSJ that markets seemed to like.
Thursday, however, was a different beast altogether. Financial markets were roiled by rates again. The 10YR spiked up quickly again, peaking at 1.753% on Thursday, before flirting with the mark again on Friday morning and settling around 1.73% by close. The Nasdaq dropped over 3% Thursday and the markets continued dropping into the close. Notably, small caps fell significantly as well. Oil prices declined over 7%.
The market seems to be having difficulty interpreting the Fed and vice versa given the utterly unprecedented nature of our current situation. If you throw in a quadruple options expiration it shouldn’t be surprising to see some skittishness in the wake of the powerful rally off of the last rate tantrum.
The base-case scenario is for the most robust growth rates in decades in the United States. Despite this, employment is still far from recovered. The ‘Epicenter’ sectors of the economy are still not enjoying pre-COVID demand and vaccine penetration is going well but is not yet so significant that a return-to-normal can be achieved. Thus, the economy finds itself at a unique inflection point and the rosier forecasts are starting to sound incongruent with the Fed’s unwillingness to preliminarily signal confidence. There is no upside for the Fed to do this until it’s certain we’re collectively out of the woods.
In a developing front in the coming political fight over climate change, GOP members of the Senate Banking Committee sent the Fed a letter warning Chairman Powell that they do not think it is within his jurisdictional purview to implement climate policy. Republicans have been sounding the alarm since the Federal Reserve joined the Network for Greening the Financial System.
Federal Reserve removed amendments it made to the Supplementary Leverage Ratio made during pandemic-induce market stress to reduce the amount of capital that banks had to hold against US Treasury Securities and central bank reserves. Banks opposed this move, citing the possibility that it could exasperate recent upward moves in rates. The Board acknowledged that it may need to address the ‘current design and calibration of the SLR over time to precent strains from developing that could both constrain economic growth and undermine financial stability.’ The Board is opening to the issue for public comment so if you have a stake and would like to make your opinions known on the issue the public comment process is one of the more important and underappreciated parts of effective governance in the United States. It’s a great way to make your voice heard and help policymakers and regulators enact more sensible laws and regulation.
Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.73% up from 1.63% last week.
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