Fed is epically - and historically - bad at policy transmissions. They rely far too much on lagging economic data and the equity markets to determine their course of action.
Historically, the Federal Reserve relies on lowering and maintaining the Fed funds rate to induce economic growth too long which spurs malinvestment. In order to pick up the slack, fiscal spending is increased to make-up the gap. Though, this tends to crowd out the private sector.
Growth and inflation tend to accelerate on a cyclical basis, but the Fed's reliance on lagging and outdated methods causes a "policy error" by tightening too quickly within a short period of time. Once trouble festers and economic deterioration occurs, usually already in the early stages of a recession, the Fed results to quickly reducing interest rates.
Post-financial crisis, the Fed has added the addition of balance sheet expansion. The inability to stomach recessions, the quick-to-act policy makers do not allow the malinvestment to flush out of the system, and more risk piles on the pre-existing burden.
But, today's FOMC minutes, and subsequent press conference, was more of the same. The market becomes volatile, and Jerome Powell kowtows. In the span of a quarter, we've gone from expecting four rate hikes and balance sheet reductions continuing in 2019 to no hikes (the Fed is "patient") and the potential to adjust the balance sheet roll-offs.
Euro-dollar markets priced in considerable easing, reversing most of the 2019 "tightening." Expected policy gets more easy in 2020 and 2021.
EDZ 2019 (pink); EDZ 2020 (orange); EDZ 2021 (yellow)
"The Powell Put Pause," on January 14:
Markets are reading into this as the Powell Put Pause, but they really have no choice since being completely oblivious to slowing global growth hitting the U.S. shores. The economic condition is not as dire as in Asia or Europe, but the rapid unwinding in leveraged short/long exposure cause things to go boom.
There are already throwing Powell into the likes of Bernanke or Yellen; and, in the end, he may end up in that camp.
The jump in equities and gold aren't too surprising though frustrating.
The Macro Strategist's TACVOL daily ranges is a quantitative filter that details the most probabilistic near- and intermediate-term trading range, in addition to a quantitative/qualitative score that measures trending sentiment.
Within the "The Powell Put Pause," we were explicit that the SPX had move room to move north:
In the "Christmas Is Cancelled" Parallax Weekly, I issued the TACVOL bottoms, which was pretty damn close to perfect. Been green ever since. But, this is the process. And, unless Powell's put actually results in a policy pause, I'll get bearish at the TACVOL top, which subscribers get every morning (currently implying another four percent move higher).
Since January 14, the SPX is up 3.84 percent higher; but due to TACVOL's dynamic design, the range has been expanding since given as it takes in data. TACVOL score is bullish, and the range top is currently 2,730.
The frustrating part is it conflicts the macro which should be supporting higher risk assets. Risk management is key.
The move in policy expectations were hinted in Monday's "Charts to Ponder," which subscribers receive at the beginning of the week.
- The EDZ 2019 (eurodollar) has tightened after a massive pivot in November, which caused yields to collapse. However, the 7- and 20-day rate of change is beginning to drift higher.
- The 7-day ROC is above to flip from negative to positive and could see an inflow into eurodollars. This would be net-negative for the U.S. dollar; 10-year yield would roll over.
U.S. 10-Year Yield (pink); EDZ 2019 (orange)
We saw the beginnings of a roll over, today, in yields.
We also cannot help but speculate the pressure Powell received from President Trump stems to the negotiations with China. As pointed out here, China needs, may not want, a stronger yuan.
In order to have a repeat of the Shanghai Accord, the Fed cannot tighten as China eases due to the currency peg. China's monetary policy would have to reflect the Fed's stance on a relative basis.
If we look as Chinese financials (CHIX) and the USDCNY (inverted), we see the PBOC aggressively raising the yuan as Powell coddles market participants.
The highly over-leveraged Chinese corporates and financial institutions cannot take a dramatically weaker yuan.
We can't say that Powell gave the PBOC the go ahead, but there is reasons to be that monetary policy concessions vis-a-vis pressure from Trump factors into working out a trade deal.
Could China buy more U.S. goods if their credit crisis blows?