We think that Powell will do his best this week to regain credibility of the FOMC as an inflation fighter having fallen so far behind the curve earlier this year and last.
Several FOMC members went out of their way since the minutes hit to remind investors they have not hit a pivot point. Some went as far to say that they would even risk an economic downturn to keep inflation at bay. Historically the “Fed put” was about restoring financial conditions. The main indicator in most financial conditions indexes is the S&P 500. It’s better to say we are supporting financial conditions that equity risk premiums.
When most talk about volatility, they are referring to the VIX, the well-known benchmark for US equity market risk. The MOVE index is a yield curve weighted measure of one month T-Bill and T-Bond options volatility. It notably ticked higher last week, but not higher than the July peak. For the FOMC to regain inflation fighting credibility, they are going to have to walk a tight line between financial conditions and longer-term inflation expectations becoming unhinged .
In the third chart we are looking at the two year inflation swap and it remained relatively stable post FOMC minutes as the market seemed to think the Fed did not offer up a dovish pivot. The market based price of inflation two years from now is a bit above three per cent. The five year measure in the next chart ticked notably higher but has not broken recent extremes. Many investors will be look at these following Powell’s 10 a.m. speech on Friday.
Getting inflation from nine per cent to six per cent by mid 2023 will be easy. Getting it to three per cent by the time we get to the 2024 election will be very hard without crushing demand. Crushing demand will not fix the global supply chain rebalancing. We should be ready for inflation to be stickier for the next few years and asset markets should respond accordingly.
Last week we bought some tail risk protection in our portfolios It’s rare that we see the combination of relative cheap put protection with a high risk that risk premiums expand . Powell has learned from the FUBAR in the December 2018 FOMC rate hike press conference Q&A. He’s been very good at sending the message. Will it be the old Fed put to protect financial conditions or the new Fed narrative about being a good old inflation hawk? We are betting hawk.
South Africa Latest News, South Africa Headlines
Similar News:You can also read news stories similar to this one that we have collected from other news sources.
Powell “put” likely to be about removing rate cuts from the outlook: Larry Berman - BNN BloombergWe think that Powell will do his best this week to regain credibility of the FOMC as an inflation fighter having fallen so far behind the curve earlier this year and last.
Read more »
Fire in three Downtown Eastside buildings displaces dozens overnightVancouver Fire Chief Karen Fry said the blaze involved three buildings near the corner of Powell Street and Princess Avenue
Read more »
Powell “put” likely to be about removing rate cuts from the outlook: Larry Berman - BNN BloombergWe think that Powell will do his best this week to regain credibility of the FOMC as an inflation fighter having fallen so far behind the curve earlier this year and last.
Read more »
Hedge funds pile into a record hawkish rate bet pre-Jackson Hole - BNN BloombergHedge funds are unleashing record bets that the U.S. Federal Reserve will stick to its hawkish script as they rapidly position for higher interest rates in a key corner of the derivatives market.
Read more »
Europe energy jumps as latest Russian gas cut plan stokes fear - BNN BloombergEuropean natural gas surged to about 15 times the average summer time price and power smashed through records as the threat of Russian supply cuts ripped through the market and threatened to push the German economy into recession.
Read more »