FOMC Preview: The Pause That Depresses

Government Shutdown Looms

Good Morning!

Contents:

1. Bottom Line

2. Real Rates and Data

3. Market Bias Going into Today’s Meeting

4. Meta Comment

5. Bank Bottom Lines.

6. ***Options Markets Matter

7. What About Future Cuts

8. Finally

Have a coke

Bottom Line

1. The Fed Should be done hiking by their own standards (real rates, Data coming)

2. It is assumed the Fed will not hike today.

3. Markets will first key today on wording that gives clues if the Fed will hike again at all for the remainder of 2023

4. Markets will then search for clues as to when/if there will be rate cuts in 2024

Real Rates and Data

If you look at the path of real rates and the Fed’s stated “data dependency” as it comes in, then they should be completely done hiking. Why?

Real rates are high and going higher due to continued disinflationary forces. Data will confirm for the next 2 months or so even if the Fed does nothing that the effects of their hikes are still working their way into reducing the inflation rate.

The market is slowly accepting Powell’s desire to not ease anytime soon, but hope springs eternal somewhat.

This because inflation data they purport to use for decisions will downtick over that time from rate-hike effects in the pipeline, previously witnessed in recent real time data, but not yet manifest in their preferred data-sets.

This is all assumed even if real time info (oil, food, etc) continue climbing.

For the last several months we have strenuously noted the Fed was supposed to get Services inflation (housing costs and salaries) down easily and struggle with goods inflation (since we import our goods).

Longer yields are higher because.. Anti-Goldilocks

The opposite has happened. Services inflation has been resilient due to Fiscal spending, union strikes, and a tendency to paper over deficits with more debt. Meanwhile goods prices retreated due to lower oil prices (these in large part form SPR sales and other global trade throttle schemes).