Fed reiterates hawkishness
Powell even postpones the idea of pivoting
"Investors have now discovered that everything is correlated to the Fed. And they are also discovering that most, if not all, of last decade's investment acumen was really nothing other than market beta and in some cases, nothing other than levered market beta".
Marc Rowan, CEO of Apollo Global Management
Last weeks have been determined by a “pivot” narrative, but job gains have been robust in recent months and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Therefore, no pivot: the FOMC hiked rates by 75bps as expected taking the FFR (Federal Funds Rate) to 3.75-4.00% in a unanimous decision. Fed Chair Powell said the Fed is strongly committed to bringing inflation back to its 2% goal and will likely need a restrictive stance of policy for some time, and added that "in determining the pace" of future rate hikes, the Fed will take into account "the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments".
Powell stated that they still have some ways to go and data suggests the ultimate level of rates will be higher than previously expected.
During the Q&A he said that as they get closer to the terminal rate, speed is becoming less important and the time for slower rate hikes may come soon but added that the principle is to keep rates restrictive. Powell also said they have not over-tightened and had a discussion at this meeting about slowing rate hikes (even if its is premature to think about a pause), but also stated they have no sense that they moved too fast and there is still a need for ongoing rate hikes with ground left to cover.
''Risk management is key here: if we were to overtighten, we could use our tools to support the economy later on; but if we failed to tighten enough, inflation would become entrenched and that would be a much bigger problem''.
The Fed Chair repeatedly called on the need to see inflation come down decisively, but also made the distinction that the Fed doesn't need inflation to come down to slow the pace of increases (there are some doves on the FOMC that have gone further to indicate the Fed could pause soon even if inflation hasn't come down).
There was two-way price action in wake of the FOMC rate decision with the statement leaning dovish at first, by adding in language about the size of future rate hikes will be determined by policy lags and the cumulative effect of policy on the economy, implying a slowdown is among us.
Then, hawkish commentary in the press conference saw the post-statement stock and bond bid completely unwind with stocks closing at lows for the session while T-Notes settled unchanged, with the curve flatter as the front-end sold off. The Dollar completely reversed any losses and was firmer on the session with DXY briefly rising above 112.00.
The focus of this session was more on the statements on the future pivot than the rates hike itself, so only stocks had a noteworthy reaction. And Powell was eager to point to that theme of the destination (of rates) being the key now, rather than the journey.
No new dot plot: No fresh estimates were released during Wednesday's meeting and they won’t be updated again until officials gather on December 13 and 14.
Powell says dots should be higher compared to September, given incoming data and the pattern seen to date. That underscores his early comments that there is still a ways to go in pushing rates up (again, no pausing like analysts were thinking about).
However, the Fed Funds Futures says peak will be at 5% in the spring/summer of 2023.
Goldman Sachs: “A bit less concerned about overtighten enough to cause a recession”. David Mericle (Chief US Economist):
"The meeting made us a bit less concerned about the risk that the Fed will unnecessarily overtighten enough to cause a recession next year, despite the hint at a higher peak funds rate.
The FOMC laid out a strong case for slowing the pace of tightening even in the face of stubbornly high services inflation, and Powell reiterated that the aim is still to reduce inflation through a sustained period of below-trend growth and acknowledged that it will take time for the effect of rate hikes on inflation to be fully felt.
Powell judged that the window for a soft landing has narrowed because the funds rate has to go higher. But we now see the odds of miscalibrating as a bit lower because the FOMC is likely to move less quickly and appears less likely to overtighten in a scenario where the underlying causes of the inflation problem are being resolved but services inflation lags behind and remains uncomfortably high for a while".
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JP Morgan: "The squeeze has been squoze". Andrew Tyler (Head of US Market Intelligence):
“Buyers were buying this morning [Wednesday] on the hope that we would rally, knowing they had more stock lower to buy; they were set up to buy on weakness (which they are doing ~3800), not to chase.
Those looking for immediate gratification should continue to buckle up (this is going to take a while), and while the rate of increase will slow, terminal rate isn’t ready to go lower yet, and probably trends higher. The most recent squeeze has probably been appropriately squeezed at this point”.
Wednesday had the worst final 90 minutes to a Fed day in history, according to Bespoke. While the initial Fed statement was initially interpreted as dovish by the market, the press conference turned hawkish as Powell said it is "very premature to think about pausing rate hikes” and hinted the FOMC will likely raise the funds rate to a higher peak than it previously projected.
After his comments Macro hedge funds press shorts and long only funds dumped the names that they bought to play a tactical bounce.
Anyway, in the past the market hit bottom when the Fed cuts rates, not when it is still hiking:
What about Europe?
After Fed delivery, attention turns to the Europe. Today (3rd of November), BoE delivered the biggest rate hike in 33 years of 75bps. With UK inflation running at a 40-year high of 10.1% in September, the Bank hikes its main lending rate for the eighth consecutive time, but weaker growth momentum and a major shift in fiscal policy is expected to ease calls for more aggressive monetary tightening.
A 75 basis-point increase in the key rate was almost fully priced in by money markets and widely expected by economists. That would bring the base rate to 3%, the highest since 2008 and represent the biggest single increase since 1989.
Meanwhile, ECB Christine Lagarde warned that a “mild recession” is possible but that it wouldn’t be sufficient in itself to stem soaring prices.