Finally, it seems, the waiting ends. Finally, one thinks, more certainty, less conjecture. Maybe, I, or we, simply place too much at the feet of Fed Chair Jerome Powell on this Wednesday. Maybe, our less than developed opinions are based upon incomplete information because this "outgoing" FOMC is working with incomplete information themselves. Maybe, accommodation for an economy, not to mention a labor market, must now pivot toward caution in the face of rapidly accelerating consumer and producer level prices. Maybe, it is through necessity that there is rotation at the committee level, as in who votes and who does not, just so that policy does evolve at least every calendar year.
As you rip that noggin of yours away from that greasy pillow that you've been drooling on all night, equity markets have spent two consecutive days under pressure, as trading volumes have increased, signaling at least some professional distribution (risk-off) ahead of this expected increase in information regarding policy direction. This has been more than a two day process however. Markets have been struggling with price discovery across universal points of sale... as volatility has hit the domains of equity, debt, currency, cryptocurrency, and commodity prices. Markets have become challenged over three weeks by a mix of higher inflation, expectations for diminishing liquidity, simultaneous impacts of the still surging Delta variant crossed with the highly transmissible (at a minimum) Omicron strain.
Elevated equity valuations, and a flattening yield curve have acted to draw support away from the equity space as Atlanta's Raphael Bostic, San Francisco's Mary Daly, Chicago's Charles Evans, and Richmond's Tom Barkin cast their last monetary policy impacting votes this day before rotating out of the committee for a couple of years. The Fed's policy making committee will ring in the new year on January 26th, with those four regional district presidents replaced by Kansas City's Esther George, Cleveland's Loretta Mester, James Bullard of St. Louis, and Boston, which is currently under the direction of an interim president... Kenneth Montgomery.
Even in "normal times", though nobody I know remembers what exactly normal is, this exchange would be one that appears to trade out a more dovish group for one more hawkish, which may be one reason why markets have moved aggressively toward accepting a harsher Fed pivot at this time. We have, over time, seen leaders such as George and Mester prioritize inflationary concerns over those of the broader labor markets, while we have also seen in the past, leaders such as Evans, Daly and Bostic lean in a more accommodative way. Bullard has always been a wildcard, and in my opinion, pragmatic. At least we know that he does his own thinking.
Now, In The Center Ring
As if children at a circus, we know not where to look. So much to see, the plate spinners, the jugglers, the entire dog and pony show. The FOMC has a lot on its plate in December 2021 that will require adjustment, or at least comment. If not addressed in the official statement or in related materials to be released such as in the quarterly economic projections, then the financial media will likely leave few stones unturned as Jerome Powell traverses this afternoon's press conference. Just what should we, who make a living off of these markets, be looking for, Sarge? I'm glad you asked.
On November 3rd, the FOMC announced that the central bank would slow the pace of its asset purchase program by $15B ($10B UST, $5B MBS) per month, from the pace of $120B ($80B UST, $40B MBS) that had been in place. Readers know well that while I had no beef with the Fed's support of the federal government's need to borrow, I had argued against the continued purchases of mortgage backed securities for about a year now, as it has been quite clear that those markets had not needed to be artificially supported for some time. I also argued that the Fed should lead off this tapering by reducing MBS purchases in isolation prior to moving on to Treasury securities. Alas, this Fed has not been reading, or at least not been heeding advice offered here at Market Recon.
The FOMC will increase the pace of this $15B per month taper on Wednesday. On November 30th, Jerome Powell, in testimony before Congress explained that the committee would consider wrapping up its asset purchase program "a few months sooner" than previously projected in order to be in a more flexible place at an earlier date. At the original pace, the program would have concluded in June. Most of us on Wall Street are expecting this afternoon's statement to potentially double that pace at least for January, with "cautious" language in place to leave room for a backwards-facing re-pivot if necessary.
The Dot Plot...
Though the FOMC's - which in this case includes everyone, not just voting members - quarterly economic projections over the year have proven less accurate than a monkey throwing darts in a room void of space and light, traders will focus here this afternoon. Remember that these projections have not been updated since September 22nd, so they are pretty darned stale.
While of course we will look at projections for real GDP, Unemployment, and both headline and core PCE, what will first draw investor attention will be the group's median, central tendency and range of projections for the Fed Funds Rate. In September, the median expectation moved from 0.1% in 2021 to 0.3% for 2022, as nine of the 18 dots showed no increase at all for 2022, six showed one rate hike, and three expected to see two rate hikes. (Note: I am assuming here that one rate hike equals a 25 basis point move. Of course moves are not restricted to increments of 25 basis points, that is just how things have been done for decades.)
In September, the median then moved to a full 1% in 2023, and 1.8% in 2024. How aggressively the membership sees the evolution of monetary policy over the next three years may not be accurate and can not account for the unknowable. That said, these dots will certainly impact the high-speed, algorithmically driven function of price discovery across financial markets. This we also know forces overshoot, even if by circumstance and not (cough, cough) through design.
You've heard it at least a million times since you were young, or maybe just since the cows came home, since if you are my age, that is more recent. The U.S. central bank, the Federal Reserve Bank, operates within a dual mandate. The Fed must seek "price stability" as well as "maximum sustainable employment." Everything else the Fed does or is asked to do, really is not their job, and not why they exist.
Now, has the Fed met its long-stated inflation target of 2%? Of course. Are prices at this pace of acceleration now stable? Of course not. Is the nation operating at full employment? Tough question. While labor markets appear, at least at this price point, to have reached a stalemate between demand and supply, one might argue that with the official rate of Unemployment (U-3) at 4.2%, and Underemployment (U-6) at 7.8%, and with the BLS showing 6.877M unemployed persons in November (Household Survey) versus 11.03M job openings in October (JOLTs), one might argue that labor markets are close.
That said, there is "labor market full employment" and there is "full employment of the economy", which are two very different things. I don't think any sentient being, even with the Atlanta Fed's GDPNow model showing Q4 growth of 8.7% (q/q, SAAR) could make the sentient argument that this economy with all of its constrained supply lines and delayed deliveries, is fully employed.
The Fed will have to address this overt pivot from one mandate (maximum sustainable employment) to the other (price stability) and will have to express some detail on the level of commitment required going forward.
The Balance Sheet...
A decision will have to be made, perhaps not today, but at least by the time that the taper winds down. Hopefully, some young "go-getter" (This is your clue, because I know you're reading) will ask the Fed Chair what he (they) intend to do with maturing securities? As of last week, the balance sheet held more than $8.664T worth of assets, up from a semi-recent pre-pandemic low (September 2019) of $3.679T, and a pre-financial crisis low (2009) of less than $1T. That's almost $5T worth of assets that would not be there if not for the pandemic.
Does the Fed allow the balance sheet to wither, which would negatively impact the monetary base and in theory place downward force upon inflation? Does the Fed roll over, or reinvest the proceeds as a means of maintaining current levels of liquidity in an "under the radar" kind of way? This is quite important, and probably something overlooked by many who report this news. This also impacts if not the actual pace of transaction, the expression of the velocity of money through ratio form, so this is a big stick.
As always, the virus remains in charge. The spread, and severity of the various strains of SARS-CoV-2 currently in circulation and the ability of available vaccines and therapeutics to corral associated human suffering and subsequently economic consequences will and can slow activity, stunting the trajectories of both monetary and fiscal policy.
Economic consequences often unmentioned are the needs of two earner households forced to manage on the income provided by one producer as schools still open and close regularly, and then there has been the slowing of household formation and small business development themselves. Long, long way from home. They say that Wednesday's child is full of woe. Probably should have held this clambake on a Tuesday.
Economics (All Times Eastern)
08:30 - Retail Sales (Nov): Expecting 0.8% m/m, Last 1.7% m/m.
08:30 - Core Retail Sales (Nov): Expecting 0.9% m/m, Last 1.7% m/m.
08:30 - Import Prices (Nov): Expecting 0.7% m/m, Last 1.2% m/m.
08:30 - Export Prices (Nov): Expecting 0.6% m/m, Last 1.5% m/m.
08:30 - Empire State Manufacturing Index (Dec): Expecting 26.1, Last 30.9.
10:00 - Business Inventories (Oct): Expecting 1.0% m/m, Last 0.7% m/m.
10:00 - NAHB Housing Market Index (Dec): Expecting 84, Last 83.
10:30 - Oil Inventories (Weekly): Last -240K.
10:30 - Gasoline Stocks (Weekly): Last +3.882M.
16:00 - Net Long-Term TIC Flows (Oct): Last $26.3B.
The Fed (All Times Eastern)
14:00 - FOMC Policy Decision.
14:00 - FOMC Economic Projections.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (TTC) (.81)