Higher in the Shorter


IT'S DIFFERENT - As much as I said it might take the market time to come around to the latest Fed decision, I suppose I'm also a little surprised. Last week's decision was a game changer and a clear move in a different direction. My best guess to explain the market's reaction is that the market continues to hold onto the idea the Fed will ultimately backtrack when the time comes. And in truth, who can blame the market for having such a reaction? The trend has been the same for years already. The Fed says it's going to do something and it fails to deliver time and again. But as much as I hate to say it, this time it's screaming that things are different. I can't emphasize this point enough because when you look closer, you can see it. 

OPPOSITE REACTION - It's important to remember that the pattern of backtracking was often accompanied by data that seemed to be supportive of the Fed moving forward with its guidance and yet the Fed would find an excuse or move the goal posts so it would have a justification to not follow through with guidance. Now however, we're seeing the opposite. At last week's policy decision, the Fed had many excuses to scale back its rate hike trajectory and it would have made perfect sense in  many ways. No wage growth, inflation low and recent jobs data softer. But seemingly out of nowhere, the Fed dug in deeper and retained its more hawkish timeline, while even arguably being more aggressive as it talked about shrinking the balance sheet. 

FACTS CHANGING - Yesterday, this hawkishness was backed up again by Fed officials and we've seen this weird shift where the Fed is almost committed to leaning hawkish no matter what. All of this begs the question about exactly what's going on? In my view, and I have expressed this many times, the Fed is finally seeing the bigger picture risks associated with leaving rates lower for longer. Financial stability is a much bigger concern with policy already exhausted and US equities driven on an intense wave of mindless momentum. Officials at the Fed are worried that if they don't start to normalize now, they could be in the extremely uncomfortable position of needing to raise rates aggressively in a cooling economy with inflation finally shooting up. And so it seems that what was once a policy that prioritized lower for longer is now a policy that is placing the importance on 'higher in the shorter (term).' 

The Fed is saying goodbye to lower for longer, ushering a new form of policy. Via @joelkruger

FED PR JOB - From a market standpoint, this should benefit the US Dollar and weigh on stocks, though as I've already highlighted, we aren't seeing this yet with the market still betting the Fed will revert back to lower for longer. I also believe the Fed needs to be doing some serious PR right now. It's scary out there and if the Fed doesn't start sounding more confident and optimistic, it could get super ugly super fast. So from a PR perspective, the strategy is that it's better to keep normalizing policy, sending the message that the Fed is normalizing for good reason, as the economy recovers. Otherwise, the Fed puts itself in the position of potentially needing to raise rates when everyone is running for the hills. The question of course is what that catalyst will be that finally gets the market waking up to this fact. Time will tell and I think it could be very soon. 


Euro Battles around 1.1700

The Euro keeps dipping below 1.1700 but has refused to breakdown thus far. 

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