3 Reasons Why This Fed Meeting Doesn't Matter

Federal Reserve
3 Reasons This Fed Meeting Won’t Matter

• Reason #1 - They’re not gonna change policy: CME’s Fedwatch gives a token 1% chance of a hike later today. It’d be a massive shock if they hiked.
  Fed speakers have been keen to emphasise in the runup to the meeting that they currently see no need to hike further.

• Reason #2 - Data Dependency: If inflation comes in hot in future, they’ll talk up rate hikes again. If it doesn’t, they won’t.
  It all depends on the data. Likewise, as long as the labour market stays tight, there’s no reason to cut, nor can they declare victory over inflation. Why?
  While they’ve got bargaining power, workers will push for wage hikes to catch up with inflation, so companies raise prices. It’s a self-perpetuating cycle until it breaks.

• Reason #3 - The next meeting is more important: Fedwatch currently gives a 29% chance of a hike in November. Far from a sure thing, but too high to rule out entirely.

Ultimately, the focus for this meeting will be on the ‘dots’ & economic projections (SEP). Actually, let’s rephrase. The focus will be on the press conference where Jay Powell will try to guide the market as to what those projections mean, while keeping as much of that famed ‘optionality’ on the table as possible.

As this excellent table from EmployAmerica shows, the Fed really has no reason to be extremely hawkish…

They’ve got to be delighted with that.

But they’ll also be wary of declaring victory prematurely. Sellside analysts are very focused on the median dot (or the expected interest rate) for 2024 shifting 25bps higher, indicating 1 less cut than their prior projections in June.

However, we know they’ll be guided by the data. So where’s the potential for a big surprise?

Expectations seem to be anchored on the Fed maintaining optionality while talking & projecting hawkishly.

If (and it’s a BIG if), they start to talk about when it could be appropriate to bring rates back to neutral, not wanting to stay tight for any longer than necessary etc. there could be champagne & fireworks.

Likewise if they rule out another hike for the November meeting.

A Fed that’s highly attentive to the risks of staying too tight for too long, and actively wanting to avoid economic damage, could be a positive market catalyst, at least initially.

We’re unlikely to hear that tonight. Which is why this meeting doesn’t matter.

Bank of England
Inflation Down, Pound Down

UK CPI came in way below expectations earlier today. Core CPI was expected at 6.8% and printed a measly 6.2%. The headline number was expected at 7% and rolled in at 6.7%…

Sooooo, way better than expected, and still waaaay above that 2% target…

Now the Bank of England’s really stuck. Before the CPI data, a hike was 80/20. Now markets have it as more of a coin toss.

The pound fell initially, then recovered those losses through the course of the morning.

So. Hike again or wait it out?

It’s a tough call. Inflation’s really starting to roll over….

Wage growth has remained resilient, to the extent that it’s now tracking slightly above inflation…

However, signs are also emerging that labour market weakness is creeping in, meaning that widespread inflation-beating wage growth is unlikely to last…

And the final piece of the puzzle. The ever-increasing burden of higher mortgage rates:

The Bank of England really doesn’t need to do more right now. A pause to assess the lagged effects is the right medicine.

But they’re scared of criticism, so they’ll probably hike anyway, just to prove this old man right…

Finding Value (Premium)
OMG STOCKS ARE EXPENSIVE!

Yeah, but which stocks? They can’t ALL be expensive right?

As usual, it depends!

Sure, the megacaps are expensive. It’s rare that they’re not. But there are plenty of other stocks offering ‘value’, and some might even be low cost compounders…

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