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Two Minute FOMC Meeting Primer

November 1, 2021

“Alexa, set a reminder to tell Ryan I beat him at basketball.”

“Alexa, set a reminder to tell Owen that I let him win so he wouldn’t cry.”

“Alexa, set a reminder to tell Ryan his jump shot is garbage.”

“Alexa, set a reminder to ask Owen how his ankles are doing after I broke them with my crossover.”

“Alexa, delete that reminder.”

“Alexa, don’t delete that reminder!”

“Alexa, add ‘tissues’ to the shopping list for Ryan’s tears.”

“Alexa, add ‘protein shake’ to the shopping list so Owen can grow some muscles.”

“Alexa, set a reminder to buy a ‘Burnt Toast’ costume for Ryan.”

“Alexa, set a reminder to buy some whine with that cheese.”

“Alexa, set a reminder to take it easy on Ryan next time so I don’t need all these reminders.”

“Alexa, set a reminder to explain to Owen how his game is meta.”

 

Yeah, so that’s how my weekend went.  How was yours?

 

Last Week This Morning

  • 10 Year Treasury down 12bps to 1.55%
    • German bund ran up to -7bps before closing out at -0.09%
  • 2 Year Treasury up again to close out at 0.50%
  • LIBOR at 0.09%
  • SOFR at 0.05%
  • Q3 GDP came in at just 2.0% vs forecasted 2.6%
  • Core PCE came in as forecasted at 3.6%
  • Goldman is now calling for a rate hike in July 2022, immediately following the conclusion of tapering
    • Bill Ackman is saying the Fed should hike immediately. I take Ackman’s comments seriously because by everything I’ve been told, he’s the best…other than his failed SPAC last week, Herbalife, Valeant, Borders, Target, JC Penney, and the prediction that KKR and Blackstone would go bk because of COVID…and he’s definitely not talking up rates because his book is positioned to benefit from that kind of move
  • Consumer Confidence was stronger than expected
  • Durable goods orders were down, but not as much as expected
  • Personal income was down 1.0% vs expectation of -0.3%
  • University of Michigan inflation expectations
    • 1yr 4.8%
    • 5-10yr 2.9%
  • OPEC is coming under pressure to increase output to control rising prices
  • G20 this week where leaders can talk about climate change and universal tax hikes
  • Jeff Bezos: “Alexa, set a reminder to tell Mark Zuckerberg that ‘meta’ in Hebrew means ‘is dead’”

 

FOMC Primer – Wednesday

The Fed meets this week, with pretty much everything telegraphed by now.  The Fed is expected to outline the plans for tapering, which is likely to begin in December.

I think the Fed’s primary goal in the coming months will be to rein in inflation expectations.  Even if they have no intention of hiking in 2022, they will want the market to think they might hike.  If the market thinks they might hike, it will have the same effect as if they actually hiked, thus controlling inflation expectations.

 

What they will probably say

  • An acknowledgement that inflation is higher and has persisted for longer than expected
  • They still believe inflation is transitory
  • But if they are wrong, they will take the appropriate steps
  • Tapering will initially step down by $15B/month (which implies a conclusion in June)
  • This is not a preset course, and they will adjust as needed
  • But while slowing the pace of purchases, don’t forget we’re still very accommodative
    • This is the example of taking the foot off gas (tapering) vs applying brakes (rate hikes)

 

“Alexa, set a reminder to tell the market inflation is transitory.” – Jay Money

 

What they probably won’t say

  • “Considerably” – the Fed has spent a lot of time decoupling the conclusion of tapering from the first hike. They might stop doing that in order to keep their options open.
    • If they drop the word “considerably” from the statement, it’s a signal they are at least willing to consider hiking as the conclusion of tapering.
    • Even if they don’t have any intention of hiking, the mere threat of a hike will dampen inflation expectations.
    • It’s a total and complete coincidence that Goldman is the bank leading the calls for a June hike and in no way are they the Fed’s chosen messenger to start making markets wonder.
  • Specific unemployment rate target
    • The unemployment rate got down to 3.5%, so they don’t want to get boxed in by tying monetary policy to a specific number.
    • This is particularly true given the Fed’s focus on maximizing employment for minorities rather than looking at just the headline number.

 

Week Ahead

Unfortunately, more volatility is expected. The Fed meeting is the biggie, but Friday’s job report looms large.  Last month brought a disappointing 194k gain, while this month is forecasting a 450k gain.

I assume you have a cardboard cutout of Jay Powell in your office and that one of your analysts dressed up as him for Halloween?  You wish you were this cool, don’t you?

 


Click to Open: The Pensford Letter PDF


 

Pensford