A Week of FedSpeak

June 21, 2021 • Estimated Reading Time: 5 minutes

Last week the Fed took a 'hawkish' turn, the dollar gained, and equities pulled back from the highs.

Longer-dated yields have plummeted since...

  • 10Y yielded just under 1.6% pre-FOMC and hit 1.35% in Asia

  • 30Y yielded just over 2.2% pre-FOMC and hit 1.93% in Asia

And cyclical bets have been smashed: The Nikkei dropped 3.3% overnight.

🔥🎯 20/20 hindsight analysis: the market was increasingly positioned one way. The speed of the move in bonds was almost certainly fuelled by an unwind of over-stretched positioning towards an inflationary outcome that was never truly on the cards...

R.I.P economic overheating concerns

FWIW, I don't think they've made any policy error here...

It's pretty hard if you don't actually change policy.

Anyway, they've got plenty of opportunity to clarify their thinking this week, with at least 15 separate speeches scheduled already...

Here's the weeks menu.

Monday: Bullard, Kaplan & WilliamsTuesday: Mester, Daly, PowellWednesday: Bowman, Bostic, RosengrenThursday: Bostic, Harker, Williams, BullardFriday: Mester, Rosengren

(Still more exciting than watching England in the euros)

I am expecting them to reinforce the AIT messaging at some point.

It might not come this week though, as the majority are semmingly convinced that inflation will be above target and employment is making a strong comeback...

They've spent nearly an entire year trying to convince markets that full employment is the linchpin of this new approach so I don't think they'll just abandon it altogether, especially once inflation begins to flatline...

On the employment front, Powell seemed to hedge his bets at the presser

"It's obvious we're on our way to a really strong labor market"

"1-2 years out will be looking at a very strong labor market"

Vs

"Liftoff is a long way off, we're still a long way from full jobs"

"we learned during the course of the last very long expansion, the longest in our history, that labor supply during a long expansion can exceed expectations, can move above its estimated trend, and I have no reason to think that that won't happen again."

Can it be both?

I've mentioned before that I see QE as entirely separate from rate hikes.

 Likewise, I'm separating QE from rate hikes here.

QE is the 'emergency response' and as the emergency passes, it makes sense to begin tapering in 2022, but don't expect this to lead directly to hikes in '23 unless core inflation is above 2% throughout all of 2022— 📈 Tim 📉 (@VolaTim) May 12, 2021 

A stronger labour market allows Fed to taper the QE emergency response, and perhaps take rates higher over the next few years if inflation is at or above 2% (as per their forecasts).

Dot Plots: Everyone hates them, Powell basically said to ignore them and they're just a simple visual representation of each Fed members best guess.

Do they accurately represent the Fed's new focus on actual data instead of forecasts? 🤔

Putting aside the timing of rate hikes, what the dots (& economic projections) did clearly communicate was a sharp upturn in positive expectations.

Forecasts: Core PCE is now forecast to remain at or above 2% for the next two years.

If these forecasts are proven correct then that's the inflation objective achieved ✔ even after this years data is disregarded for base effects.

'Transitory' practically disappeared from the statement and presser, leaving plain old 'inflation' to take centre stage...

Chris Weston

The August Jackson Hole/September taper announcement is practically nailed on.

At some point the focus will shift back to employment, but the signal so far is clear for QE.

Then there's the question of the forecasts actually being correct...

UBS have serious doubts and see the Fed as Q3 hawks, but 2022 doves 👇

I'm fully onboard with this reasoning for 2022 dovishness.

There's not much margin for error in the Fed forecast seither.

If core PCE drops just 0.2%, inflation is back below 2% and they're missing targets again...

At 1.9% perhaps there would still be an argument for hikes based on a backward looking measure of a 2% average over the post-pandemic period or something convoluted.

If core PCE drops back to 1.5% there's absolutely no rate hike argument to be made.

FedSpeak will dominate this week, as the market fills in the thoughts behind the dots.

Flash PMI's, the BOE meeting (no policy change expected) and the Core PCE from the U.S. are the main events on the calendar.