Notes From Underground: Take Jerome With a Big Grain of Salt

A quick view on Wednesday’s FEDERAL RESERVE‘s meeting: According to the newest Fed stenographer, Nick Timiraos, look for the central bank to raise rates 75 basis points in an effort to get ahead of the curse of HEADLINE inflation. This level is baked into the present market values. Look to see if there is any discussion of slowing the FED FUNDS increases as the FED tries to get a handle on the impact of $95 billion a month balance sheet unwind and a DOLLAR that has risen 14% since the beginning of the year, and more than 20% versus the Japanese yen.

Outside the US borders, the global economy is slowing and the stronger dollar and its influence in financing global finance is promoting a high probability of tightening financial conditions causing great stress for many dollar-dependent nations. If the consensus for an increase of 75 BASIS POINTS is correct look for the FED TO BE EXTREMELY HAWKISH WITH ITS USE OF THE DOT PLOTS. That’s the tool the FED has used to provide FORWARD GUIDANCE FOR MANY YEARS. The central bank has maintained that they would move away from FORWARD GUIDANCE but its use is too valuable a tool on a cost-benefit basis.


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In Tuesday’s Wall Street Journal Timiraos provided a key to Powell’s strategy. He wrote, “On Monday, investors in interest-rate futures markets saw an 82% probability of a 0.75-point rise and a 18% probability of a full-point increase, according to CME GROUP.” In the following paragraph Timiraos said: “EQUALLY IMPORTANT WILL BE SIGNALS FED OFFICIALS SEND ABOUT HOW MUCH HIGHER THEY EXPECT TO RAISE RATES,AND HOW FAST THEY EXPECT TO DO SO,AND WHAT THEY EXPECT THE ECONOMIC CONSEQUENCES TO BE.”

This is critical for the POWELL FED that prides itself on getting a great deal of bang out of its communications. Think back to how Powell et al prided themselves on preventing a crash in the corporate bond markets in March 2020 by claiming to purchase a huge amount of debt. A lot of jawboning with little capital did the trick. BY making the DOT PLOTS very HAWKISH going forward they may get the outcome without having to raise rates as high to levels that some are desiring.

There will be many questions from the press about the DOT PLOTS and that will garner the headlines that drive the algos. If the yield curve steepens, assets rally and the metals find a stem their decline, the markets will have read the potential reticence of Powell, especially as the November midter elections loom. Powell is all about more bang for the buck. In June 2021 it was Powell who said “Take the FED’s DOT PLOTS WITH A GRAIN OF SALT.”

In elucidating his comment, Powell maintained the FED DOT PLOT is not a great forecaster of future rate moves. Be patient with your trades as the markets will be very volatile during the press conference. My over/under on dot plot questions is FOUR.

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