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Wow. That's all there is to say about the reaction to the Fed meeting yesterday.
🔥 HOT TAKE There are too many hot takes. Thanks for coming to my Ted talk.
If there was one message to take away from the meeting/presser, it's this:
“I think there’s quite a bit of room to raise interest rates without threatening the labor market,”
Or maybe this:
“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,”
Wait, no. It was definitely this one:
"Fuck your calls"
OK, he didn't say that, but he didn't NOT say that so maybe that was what he meant. Are you with me guys? Guys?
Serious Fed Talk
They're going to be hiking. It'll start in March and unless inflation starts to drop off pretty drastically they'll keep tightening in one form or another until it does.
Will they go 50bps at the next meeting? Sure, why not?! (they probably won't).
Will they go batshit crazy hiking like BofA thinks? 👇👇
If the Fed are set to remain "humble" & "nimble", then doesn't it make sense that analysts should too...?
In any case, the Fed seem to have thrown in the towel on trying to predict what will happen. The path will be determined by incoming data.
First up, Core PCE and the Employment Cost Index tomorrow 👇
If the ECI & PCE come in hot tomorrow, it would be no surprise to see equities in the red by the end of the day.
What does it ALL mean for equities?
Who knows?! Risks are surely to the downside the longer this continues.
The Fed are 'trapped' by inflation.
There's a big old buffer built into equity prices for Fed to lean into. This buffer and high inflation means that the 'Fed put' is likely lower than presumed.
Where are the drivers going to come from for higher equity valuations?
Fiscal drag, supply chain issues & aggressive tightening of monetary policy are not a healthy environment for companies to generate bumper profits. The comparisons with 2021 won't flatter either...
Yet markets are holding up reasonably well given the outlook.
“We’d be buyers here,” said Christopher Ouimet, a portfolio manager at Logan Capital Management, which owns about $60 million in Microsoft stock.
“We think there’s a lot of noise in the marketplace right now. Most of the high-growth stocks are getting washed out here.”
Ouimet said the rise in the yield for the 10-year Treasury note has little to do with whether Microsoft is “going to be able to sell Azure contracts.”
Or maybe it's a justified, high conviction that this will all work out. The Fed will land the inflation plane safely and smoothly in the economic sweet spot, and all this worry about seven rate hikes in a year will be for nothing...
Markets much prefer the comforting illusion of certainty instead.
So this wasn't a welcome message:
“The economy can throw us for a loop at any given time, so you can’t really message about a path for policy because it is highly uncertain given the outlook itself is highly uncertain.”
For now, inflation is all that matters to the Fed. It is set to moderate, but perhaps not as much as required/expected. The Inflation Guy suggests:
"we’re now in a land of 3-4% core, maybe if we’re lucky it’s 2.5-3.5%. Getting it back to 1.5%-2.5% will take strong leadership (HA!) and a long time."
If so, how will the Fed navigate this?
A highly indebted society dependent on low rates vs a central bank intent on slowing inflation...
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