Fed Moves Liftoff Up a Year, Makes Technical Rate Adjustments

Fed Moves Liftoff Up a Year, Makes Technical Rate Adjustments

“If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”
-Alan Greenspan

Breaking rocks in the hot sun, you fought the fed and the fed won! Hopefully, you didn’t short bonds this week because if you did, you’re probably a bit testy and upset. It’s ok, we get it. There was a lot of reasons to suspect Jay Powell might bungle up and deny the evidence of inflationary conditions that is mounting daily, but instead he seems to have seized control of the narrative to the surprise of vocal critics. Don’t underestimate the guy holding the biggest stick!

The reflation trade and commodities got hit particularly hard in the wake of comments. Not only did markets buy Powell’s transitory narrative but rates went down. Powell specifically said that this is the beginning of “Talking about talking about tapering” without actually answering the question of when he would taper. He suggested we retire the term, but we like it so much! In the end, the Fed appears to be letting the data drive its decision making and it doesn’t have enough data so it successfully bought some time.

Don’t get us wrong we do think inflationary pressure is coming, but on a different timeline and for different reasons than most. We like to pay attention to generational forces more than parsing Fed speak. The infamous ‘dot plot’ showed that 13/18 Fed governors had moved their estimate for rate raises to the end of 2023, up from only 7 in March. The Fed also made technical adjustments to some rates associated with open market operations.

The Fed increased the rate of the Reverse-Repo facility from 0.0% to 0.05% and it also increased the rate on excess reserves from .10% to .15%. This can be confusing because these raises are actually accommodative actions meant to keep the Fed Funds rate to the lower range of 0.00% to 0.25%. A day after the change the facility recorded a record$756 billion in inflows. Chairman Powell opined that “The reverse repo facility is doing what it’s supposed to do, which is to provide a floor under money-market rates and keep the Fed Fund rate well within its range. So, we’re not concerned.”

In typical Jay Powell fashion, he also had Jeremy Bullard come on CNBC’s Squawk on The Street and play Bad Cop to his Good Cop; Hawk to his Dove. The well-respected and typically more hawkish member stated that he was even more conservative in his estimates for liftoff (and was a spoonful of sugar for inflation hawks) and the potential for runaway inflationary pressure. He thinks liftoff could come as soon as 2022, which is the Hawkish end of the dot plot.

The decline in rates simply makes the returns of stocks more relatively attractive compared to debt and puts a pep in the step of the high-flying (and index-driving) FAANG names. With equity ownership already at a record 41% of household financial assets, we’re thinking that a lot of folks are very much underestimating how strong equity markets can be over the next 5 to 10 years.

Unfortunately, a lot of commentary about the Fed is ideologically motivated and also quite laden with resentment. They’re either about to blow up the world with their abusive poverty-causing profligacy, or on the other hand maybe they’ll forever rectify the perpetual problem of wealth inequality and turn back climate change in the United States. Both these narratives are extreme and divorced from the facts.

While commentary like this is certainly entertaining and many economic incentives are pushing people to embrace hyperbolic narratives, we also think much of it misses the mark. The Federal Reserve is an agency of serious people who take their duties very seriously. We’d love to remind you that the stocks you own are quite unaware of your political and philosophical ideas about monetary policy!

Since Jay Powell was not personal friends with Ayn Rand (Like Alan Greenspan was) he’s already started off at a disadvantage with a lot of the loudest most outspoken folks on the subject. A lot of opinions you hear were set long before the Fed acted and likely wouldn’t have changed whether Jay brought his dancing shoes or not.

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 at an even tamer 1.454% than last week.

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