We’re back to policy rhetoric and watching inflation – Oh, yes, and Fed-bashing

Outlook: The major-currency central banks are done for the moment and we’re back to policy rhetoric and watching inflation. Oh, yes, and Fed-bashing. The CME Fed funds tool yesterday, before the Fed decision, had shown a 95% chance of a 75 bp hike. That has now fallen to zero, of course, but accompanied by accusations of the 50 bp we did get was “dovish.” The dovish label applies mainly to the QT methodology—let the paper fall off the balance sheet as it matures—and not the hike per se, but it’s the worst thing that can happen to the Fed—a bloodthirsty market.

The 75 bp fantasy came from a single Fed (Bullard) making a one-time comment that he qualified by saying it’s not his preferred base case, but the market ran wild with it like a horse with a bit in his teeth. In contrast, the 50 bp version, also started by Bullard, was quickly picked up a bunch of other Feds , including chief Powell, and widely publicized. Why the market chose a single comment from a single Fed to hang its hat on is a mystery. The market erred. The Fed signals its intentions with great clarity these days. But it’s true that the Fed erred in not acknowledging the spread of the fringe into the mainstream expectation.

Obviously the Fed is not dovish if it’s hiking by 50 bp and another 50 bp likely in June, but equities and commodities went up and the dollar went down, so obviously the market is right. Market prices are always right in the sense that they are evidence of action, not words. It doesn’t mean the analysis behind the action is right, but it may mean “confidence and trust in institutions” is not as strong as it could and should be in a crisis. Especially when the other big independent institution, the Supreme Court, is losing the public trust by gobs with every passing minute.

Accusations of a true-color dovishness are not only in fringey publications, but made the front page of the Financial Times. It’s absurd to say the Fed is dovish after the first 50 bp hike in 20 years, but it looks wimpy in the context of 75 having been expected. There was nothing wrong in the Fed’s transparency—it has been signaling 50 bp and it delivered 50 bp. The market pumped itself up on a false idea and is now throwing a temper tantrum because it was wrong. The ironic part is that if Powell had NOT said the Fed is declining to consider 75 bp and let the market go on thinking 75 is somehow on the table, the reaction might have been saner and tamer.

It’s ridiculous to say the high-falutin’ finance and economics types at the Fed should be heeding the silly fantasies of some of the crowd, but wait, it’s their job to know what the market expects and the CME Fed funds tool is hardly social media gumpf.

Criticism is also upon the plan of letting maturing assets run off the balance sheet instead of actually selling any. For longer-tenor assets, this will take forever—well, a long time.  The Fed has $1.92 trillion in assets of 5-10 years.

A third “shortcoming” is Powell admitting the Fed doesn’t know what the neutral rate should be. Aiming for transparency, something the market has agitated for years (in part because of Greenspan’s deliberate obfuscation), Powell said the Fed can’t identify the neutral rate “with any precision.” The FT reminds us that  “Fed officials broadly view neutral to be about 2 and 3 per cent, when inflation is at 2 per cent, but some economists argue it is now much higher — potentially as much as 5 per cent — given the magnitude of price pressures.”

“Despite that challenge, Powell wavered little from his earlier optimism that the Fed can achieve a ‘soft or softish landing’, not least because of the strength of household and corporate balance sheets as well as the historically tight labour market.”

It looks like the market was out to get Powell no matter what he said, but to be fair, the Fed appears somewhat clueless about the depth and width of criticism of its policies. This is not to say the Fed is wrong, just out of touch with a seemingly fairly fat tail. This is often the case, as we have observed over the years, with the phrase “behind the curve” having entered the general lexicon.

The question now is whether the dovish label gets removed over time and if so, how much time. The rapid response in asset pricing was likely driven by a minority that was quickly joined by a majority that was just jumping on the bandwagon and not necessarily buying into the dovish story. Let’s not forget how much money is managed by robots who see a statistically meaningful price move and hop on board, no thinking required. When the humans take the time to look again, the “second thoughts” syndrome sets in and we get a complete reversal.

This is all too likely to be the case with the already recovering dollar. Today we eat crow.

Not in the same category but equally minority-driven is the idea that the Kremlin’s inner circle is starting to consider a coup against Putin. This story has been around for a few days but has yet to reach the mainstream press. It lives mostly in UK secondary-level publications and if you read three or four of them, you immediately see they are all plagiarized from the same source.

The gist is that former generals and KGB officials are conspiring to oust Putin and end the Ukraine war, led by the security service FSB and including former officers from other agencies “GRU, KGB and FSO, other Russian intelligence units.” Social media is reported to support the idea. (And so what?)

Of course Putin fears a coup. This is Russia, after all. He has a ton of increased personal security, including perhaps a body double. But that doesn’t mean the story is not full of half-facts and a huge dollop of wishful thinking. We can probably safely assume Putin has already put down a dozen coup-plotters. The probability of a successful coup is very low. Having said that, consider what happens to the price of oil if a coup were to succeed. 

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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