Fed no doubt is pausing
Abraham George Macro Musings
Finally, the Fed did exactly what most of us expected to do. A quarter-point hike was widely expected but the devil is in the details and not what is reported by CNBC and Fox News.
As I have written before the Fed’s favored gauge of inflation is the core PCE. With the latest hike the Fed has gone above that rate and we can comfortably think the Fed is ready to pause or step back a bit.
The whole of last year Chairman Powell told us they have more ground to cover but yesterday he said they have covered a lot of ground. Before he said we will want to reach real positive rates but yesterday he said real rates are positive. In the December press conference he never used the word disinflation but yesterday he used it a lot.
But what was the real concern of the Fed for all this time.? . It was jobs. In the last ten months, he has talked so many times about the mismatch between the number of job seekers and the number of job openings. He argued that there were two job openings for every job seeker.
So what was his concern? With leverage in the job market, job seekers and employees can seek higher wages, where wages feed into higher inflation, which feeds into higher wages and the cycle continues.
Coincidentally the latest job openings data came in yesterday morning. The truth is, it is virtually unchanged from ten months ago. Really no progress.
When asked about that what was Powell’s reply? He just dismissed it by saying it’s been quite volatile.
It is a very important indicator that inflation will persist but Powell didn’t want to talk much about it. I think it is one biggest clues that the Fed is softening its position. Another thing that he also didn’t do was talk down the stock market. He did that many times last year. One more thing the Fed did not do was it did not include that the inflation persistence was due to the supply and demand imbalances related to the pandemic or that the war in Ukraine is causing any more inflation. While it is and from what I know the war is not over and it will still continue to be long drawn.
What I gather from the recent action and the Fed’s statement is that the Fed is no more going to be very aggressive but will continue to make small hikes but is still not ready to pivot.
What does this mean for the stock markets? I think it will be overall good. The interest rate markets are pricing in a rate cut by the end of the year and the ten-year government bond yields are trading more than 200 points lower than the historical average relative to the Fed funds rate.
To me, that is good for the equity markets and bond markets. Gold should continue to do well and the dollar should continue to be weak.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.