Notes From Underground: Wow Unto Chair Powell

The previous blog post about President Lagarde painting the FEDERAL RESERVE into a corner OUGHT to be revealed tomorrow as there is expected to be no change in FED policy and I believe that Chair Jerome Powell will do his best to pose as dovish as possible. If there is a CHANGE it will be in the mix of the QE as the SOMA will be moved to cut MBS purchases and replace mortgages with longer-term treasuries.

The purchases of longer duration U.S. debt would probably lead to an initial flattening of the curve but I advise caution to see how long that trade would hold. The last FED meeting led to a dramatic flattening of the 2/10 and 5/30 curves as the markets sold the belly of the curve in a false bow to FOMC hawkishness. The market may interpret a shift to purchasing of longer-term Treasury debt as yield curve control (YCC). Be patient and let the algos drive the market in reaction to headlines. Following President Lagarde’s press conference, we at NOTES warned that the remainder of the summer would be filled with news from the ECB dissenters. On Tuesday, Robert Holzmann of the ECB and Governor of the Austrian Central Bank was interviewed on Street Signs Europe. CNBC ran the chyron, “ECB’s Holzmann says central bank’s new policy guidance was ‘a step too far.'”


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Lagarde jumped too fast with the forward guidance on lower rates for longer. Holzmann suggested that the summer was no time to proceed on such an aggressive policy and they should have waited to see how the PANDEMIC proceeded and of greater interest Holzmann advised waiting for the FED to announce its intentions. It appears Lagarde wished to get out ahead of the hawks, thus putting Powell in an awkward position. More will be heard from the other agent provocateurs — Knott, Weidmann, Wunsch. The German elections will be indicative about how concerned voters are with the ECB and inflation in Germany.

***The first question to Powell from the press OUGHT to be: Chair Powell, you and many others including Treasury Secretary Yellen have maintained that REAL unemployment is close to 9.5%. The concern of many Fed regional presidents is inflation of 5%. Which one of these mandates carries the most weight in your decision today?

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