Having now pivoted twice since his market-crushing "far from neutral" speech, Fed Chair Jay Powell has 'normalized' himself to the Bernanke-Yellen ilk, throwing out any hopes for a Volcker-esque return to reality anytime soon.
The problem, as former fund manager and FX trader Richard Breslow notes, is that what is left of Fed credibility is rapidly evaporating as the market's machinations are clearly more important to Fed policy-makers than any macroeconomic data dependency they may proffer publicly.
Perhaps it was the company he was keeping in Atlanta, but the unmistakably dovish message by Fed Chairman Jerome Powell went too far.
He may have felt he had no other choice. It was an indication that we haven’t gone far in extricating ourselves from the post-financial crisis reliance on monetary policy as the only reliable policy tool for ameliorating the world’s ills.
It’s understandable why he feels he is the only responsible adult guarding the economy. And maybe much more. But, at the end of the day, what he mostly managed to accomplish was a reaffirmation that data dependency looks a whole lot like stock-picking.
Which is problematic given his response to a question about what subject he thinks needs greater academic study. The answer was the linkages between asset prices and the real economy.
This week, in addition to the December FOMC minutes, we have no fewer than nine scheduled speeches by Fed officials. Including another bite at the apple by the Chairman on Thursday. They need to be very careful not to club the market over the head in proving how accommodating they are now willing to be. Even if that is indeed where they fear they are headed. They will have to walk a very fine line in their messaging to keep things calmer rather than sending volatility back to the races.
They run the risk of sounding genuinely scared and overstating the level of economic slowdown. Or sounding hawkish, given the market’s rate-cut pricing they are not pushing back against. Neither of which probably reflects their reality. The difficulty the Fed has now, and going forward, is having to describe non-economic balance of risks in purely economic terms. But in this environment, the last thing they can afford is to be accused of playing politics. Make sure you keep reminding yourself that, in practice, the definition of data-dependency is a broad one.
It will be fascinating to get a sense from the minutes of how their views have changed, if at all, since the last FOMC meeting. The December outcome, and how it was described at the press conference, was a dovish hike. How dovish remains to be seen. But if the meeting recap is much closer to what we got last Friday than how it was originally interpreted, they should have been more explicit at the time and saved us all a lot of grief.
Right now, traders are having trouble not believing that, in fact, they are being walked slowly toward an outright admission by the Fed that the hiking cycle is over. Friday’s equity rally was certainly impressive. The technical picture, however, remains ambiguous. Albeit with a much healthier look than a mere two trading days ago.
What was more stark was the compression of high-yield credit spreads. The price of oil, notwithstanding. You have to take any one day’s price action in this not super-liquid market with a dash of caution, but how this index trades in the next week may tell us a lot about the near-term path of more widely traded assets. And it really does look like spreads experienced a clear technical rejection of December’s widest levels.
As far as the dollar is concerned, the market wants to see the flaws in the U.S. and be optimistic about the relative attractiveness of other alternatives. It is a story-line that is the current narrative. And satisfies a wider current view of the geopolitical landscape. Just keep re-evaluating the global balance of risks to satisfy yourself that it is still a valid world view.
Friday, with both the non-farm payroll and Powell we learned a lot and are now better prepared to properly begin to engage with the markets for the new year.