Half Baked Hopes Souffle?
Continuing on from The Fed Put? Did seeming Fed dovish-ness bake in some future rate cut yeast, causing stocks to rise? ...
Any FFR (federal funds rate) cut will be an admission of policy failure, a confirmation of econometric falsity and disingenuous chicanery in managing already "half baked" expectations.
Speaking of which, the market is "betting" 70% in favor of a cut in next two meetings, and has ALREADY "priced" in 50bps in cuts by year end.
Above, target rate probabilities for the October 30, 2019 meeting (four down the road) indicate a 97.9% chance of a rate cut. CME Fed Tool... probabilities extrapolated from futures data.
Yesterday, Draghi announced that if inflation does not pick up, the ECB will use its tools, including rate cuts, markets erupted. If the Fed maintains its seemingly dovish stance, removes the word "patient" or makes a dot plot change, equities could again rocket to the upside.
All those bets, ED, bonds, swap rates, swap spreads, are in a very crowded trade at the moment. What might happen if the Fed seems neutral or less than dovish, and unwinds rate cut expectations, making all those bets and pricing wrong? Faster than a collapsing souffle, destabilizing excesses in a crowded trade might implode? TBD.
The Swiss Watch of Finance: Where Fed Rate-Cut Odds Come From is a nice explanation of FRA's (forward rate agreement), ED (eurodollar) curves, and the CME tool....
"With inflation being a little bit on the light side, there’s the capacity to adjust policy if that’s necessary, but the fundamentals for the economy continue to be solid," - FOMC Chicago President Charles Evans
"A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown... Financial markets appear to expect less growth and less inflation going forward than the FOMC does, a signal that the policy-rate setting may be too restrictive for the current environment." - FOMC St. Louis President Bullard
"We will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective... Using monetary policy to push sufficiently hard on labor markets to lift inflation could pose risks of destabilizing excesses in financial markets or elsewhere" - FOMC Chair Jerome PowellWith "robust" economic conditions, unemployment at a "50 year low", and tame "2%" inflation, how can already low rates be restrictive? Why does one need "insurance", what type of slowdown is "expected", and what would be "sharper than expected"? Moving West...yesterday's Nattering....
Our two cents.... The Fed will not admit to policy failure viz. cut rates until after GDP prints sub 1 or negative for 2 consecutive quarters.As return on inside money (typically short duration < 1yr) is less than outside money (IBDD or IOER) which is contractionary, balance sheet roll off, IOER (interest on excess reserves) and RR (reverse repo) rates are a much more important story than FFR.
Any FFR (federal funds rate) cut will be an admission of policy failure, a confirmation of econometric falsity and disingenuous chicanery in managing already "half baked" expectations.
Speaking of which, the market is "betting" 70% in favor of a cut in next two meetings, and has ALREADY "priced" in 50bps in cuts by year end.
Yesterday, Draghi announced that if inflation does not pick up, the ECB will use its tools, including rate cuts, markets erupted. If the Fed maintains its seemingly dovish stance, removes the word "patient" or makes a dot plot change, equities could again rocket to the upside.
All those bets, ED, bonds, swap rates, swap spreads, are in a very crowded trade at the moment. What might happen if the Fed seems neutral or less than dovish, and unwinds rate cut expectations, making all those bets and pricing wrong? Faster than a collapsing souffle, destabilizing excesses in a crowded trade might implode? TBD.
The Swiss Watch of Finance: Where Fed Rate-Cut Odds Come From is a nice explanation of FRA's (forward rate agreement), ED (eurodollar) curves, and the CME tool....
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