SPECIAL: Fed Preview and What The Fed Fears
Goldman powerpoint and more
Housekeeping: Almost every bank on the street is calling for a 75 basis point hike from Powell and the Fed today. Goldman has put out a powerpoint of charts showing what they believe will happen now and going forward. We also have a special comment that may either be in left field or ahead of the curve. You decide.
Market Rundown:
Good Morning. The dollar is up 53. Bonds are slightly stronger. Stocks are strong, up between 40 and 75 bps. Gold is up $9 after touching up $13. Silver is up 29 cents. Crude is unchanged. Natural Gas is also unchanged after being significantly stronger earlier. Crypto is up about 1.2%. Grains are soft.
GoldFix Podcast: Will the Fed hike 75 or 100 bps?
Podcast part 2 discusses what happens to perception if Fed hikes 100 bps and is HERE
Summary of Goldman’s Report
Expect the FOMC to deliver a third 75bp rate taking the funds rate to 3-3.25%.
Expect 50bp hikes in November and December, taking the funds rate to 4-4.25% at year end.
Services inflation will likely remain high, but we expect the FOMC to slow the pace of rate hikes because…concern about over-tightening will eventually rise, and the drop in consumer inflation expectations should reduce concerns.
The thing that hit us wrong was “services inflation will likely remain high”. That should not be the case at all. It reminded us of this:
Maybe the path to slower services inflation – OER and all other services – is through lower asset prices. - Zoltan Pozsar
Fed Efforts Are Not Working at All.
Beyond their 75 bp hike we are not so sanguine about Goldman’s FOMC path . Here’s why.
Inflation may be headed lower, but how it is lower is the problem and betrays the Fed’s lack of effectiveness in handling this emerging crisis.
Core has not backed off. Inflation is down because of dwindling bullish energy speculation and SPR draws only— not because of domestic services inflation backing off.
All we really need to get inflation back on the upward path is a spike in oil. Energy market success is masking the real problem here in a big way. They problem is services-inflation is accelerating.
The Fed’s actions were supposed to stop services-inflation first. Remember: The Fed had previously admitted they cannot stop imported goods supply-side inflation. They claimed they will be better at controlling domestically generated service side inflation. Which makes perfect sense considering the US makes little of what goods it consumes.
But Zoltan Said…
Zoltan Pozsar said as much back in February and again in April. From: Cure Inflation "By Forcing Long Term Rates Higher"- Zoltan Pozsar
They [The FOMC] understand that they have no control over goods prices unless they curb demand through a recession – which given their updated mandate isn’t an option. But they also know that they have a lot of control over services inflation… SOURCE
This is a key component and rationale for the Fed’s actions thus far. Control services inflation easier by decreasing domestic demand via rate hikes. Supply side inflation will have to take care of itself ultimately as they cannot print goods. Yet services inflation increases even while shares drop. This suggests more tightening now, and more easing after the crash that it causes.
Fed Rate Hikes have No Effect on services inflation yet…
As TS Lombard Noted this week: “But the fact that core services inflation remains high shows just how tight the US labor market remains. It will take more time, more tightening and more labor market slack –even a recession –to bring it down. “ (PDF at bottom)
FULL ANALYSIS AT BOTTOM