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Going to make today’s post short and sweet.
Recently the market has gotten somewhat excited that the Federal Reserve might slow down the rate of Federal Funds tightening. This has been the result of three developments:
Speeches - FOMC - Board - Members - Federal
A few speeches from FOMC Board members that indicated the Federal Reserve was concerned about the flattening yield curve, and that the Fed’s goal would be to ensure it doesn’t invert.
A recent phenomenon where the effective Fed funds rate is trading at a higher spread to IOER (interest on excess reserves).
Troubles - Market - Countries - US - Dollar
The increasing troubles in certain emerging market countries as US dollar liquidity has tightened.
Between these three concerns, the market has built a “dovish hike” into today’s FOMC announcement. Many participants believe the Fed is more likely to slow the pace of tightenings as opposed to increasing it.
Well, sold to them.
I am not claiming to know what the correct policy should be, but I am confident that Jerome Powell’s Federal Reserve will not alter course for any of these three reasons.
Federal - Reserve - Meeting - Something - Breaks
The Federal Reserve will hike at least every other meeting until something breaks. Full stop.
Powell will not reduce this pace because the 5-30 spread is hitting new lows. Nor will he care about the effective Fed Funds spread over IOER. And finally, the Federal Reserve has a mandate...
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