King Jerome Volcker Hawk Powell VIII
The Fed is on a mission to cause a recession. The market only somewhat fears this outcome.
Having fun? If you’re an investor with risked capital on the line, the answer might be no, especially when the Fed chairman refuses to acknowledge the end is near for tighter monetary policy. But if you have capital deployed and enjoy price study like us, then how could you not be? Let’s dive into our post-mortem on yesterday’s FOMC decision and subsequent market reactions.
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All Hail the King
Jerome Powell didn’t say anything particularly new. In fact, he opened his press conference by claiming that he didn’t have anything new to say in relation to his Jackson Hole speech from last month. And his message was once again stern: the Fed will keep policy rates in restrictive territory, which they have just now entered, for as long as it takes. Recession? Higher unemployment? Falling asset prices? No cares for the chairman. Bring it on, he says.
Resetting our expectations for monetary policy as we close out 2022—as we have noted throughout the year, front-month contracts of Fed Funds futures are essentially never wrong. Of course things can change, especially unforeseen geopolitical events or sudden collapses in liquidity, but every FOMC meeting’s rate decision this year has been well forecasted by the money markets in the proceeding weeks. November is unlikely to be different, and I will probably be forking over a large cash payment to a rates buddy who I bet we wouldn’t see a 4% upper bound on Fed Funds. This is because with only 6 weeks until the November meeting, the market remains pricing in a fourth consecutive 75 basis point hike. With two-year yields 100 basis points higher than Fed Funds AFTER yesterday’s hike, the Fed has ample room to keep stepping on the neck.
Now, we will be watching this November's expected rate like a hawk (no pun intended). It trades at slightly below 75 basis points today, and with a flurry of economic data hitting the tape over the next three weeks, it would be fair to expect some choppiness for this rate. Could it see an increase to the 75-100 basis point range? Unlikely that the Fed ramps up the pace of tightening given its recent rhetoric. Could it drift to 50 basis points as the economy shows more signs of slowing? Yes. Could it entirely dissipate? Not without some sort of all-out collapse. Now let’s get into the charts—I have 12 of them for you today.
Chart pack and key levels to watch
Let’s do some rapid-fire charting to give readers a sense of where markets are today, where the behavioral confluence levels might be, and how risk managers are approaching these volatile markets. Starting with 2s on a weekly basis: