I’m not sure if you stayed up until 2.30am to listen to Fed Chair Powell’s press conference.

I did, and as I had pointed out in Is SVB’s failure really cause for a Fed pivot? the collapse of outlier SVB was nowhere near enough for the Fed to pivot.

As I mentioned in that note:

“However, assuming the measures are sufficient and/or are bolstered, and given the hot 5.5% core less food and energy inflation print just released as I am writing, the Fed will probably continue tightening and we will go back to discussing the size of its interest rate hike, when it next meets on 21-22 March…….
………………..I think that this is what Powell is hoping for, and if his old boss Yellen can demonstrate ‘nothing to see here’ because it’s not systemic and she has it backstopped, Fed Chair Powell can continue the fight against public inflation number one.
And whether he is successful or not in that fight is irrelevant because it is a political fight levied on him by Joe Biden. Biden feels that getting inflation under control is more important to more people than an all-time high bond or equities market is to Wall Street and rich people.” Mike

Well, Chair Powell just raised the federal funds rate (FFR) a further 25 basis points to total 4.75% to 5% and stated:

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.” Fed Chair Powell.

He had been very clear about what his Fed was going to do - attempt to break a few things to get inflation down to 2% by increasing the FFR and running off the balance sheet.

And what better way to get the market to listen (and for other central banks to follow suit) than to come with phasers set to stun and blast out another FFR hike of 25bps (shame it wasn’t 50bps) in the middle of what the market is calling a banking crisis!

One more like that and the FFR sails over 5%.

As I started to write this note, gold, bitcoin and oil responded with increases.

And short-term treasuries were also up with the 2-year yield slightly down by about 15 bps. That was probably because the bond market was relieved the Fed did not go 50bps, and because of the following statement that diluted the Fed’s usual language of “ongoing rate hikes”:

“The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

And during question time Powell made a point of saying that the market should focus on the words “some” and “may”.

But as I come to wrap up this story, bitcoin has just dropped 5% and crypto and tech are getting hammered.

Hmmmm, the market is yet again waking up to a pivot being further away after yet again pricing it in too early.

Asset prices will no doubt whipsaw as different views on when the Fed will loosen monetary policy circulate around markets in the coming days.

And some time later in the year, once the Fed has meted out sufficient justice to high spending, speculative constituents and if and once inflation is well and truly rolling over, we might get the pivot (rate cuts) - although that could be after a ‘pause and do nothing’ to ensure inflation is under control and won’t come back.

Could a pause and/or pivot come earlier and re-engage stocks and crypto higher? Sure, but that scenario probably only happens if we have a deep banking crisis, or if banks stop printing money, i.e., if they stop lending due to liquidity/duration squeezes and fear of depositor bank runs (despite the BTFP and discount window providing support) and people stop borrowing, investing and consuming.

Let’s not forget that Powell is looking for sustainable disinflation to show up across the full CPI spectrum and if there is a material slowdown in lending, that would certainly contribute to his desired outcome. And let’s also not forget that at some point we will reboard the QE train to nowhere, due to 700 years of money creation and the profound debasement that has resulted.

But given this inflationary cycle, we’re not quite there yet and we may even get another 25bps next time, depending on what the unemployment, job starts and inflation data show in the meantime. We will just have to wait and see.

And talking about the meantime, we just learned more about Chair Powell. And that is that he probably enjoys Star Trek. Today, he got his full Jim Kirk on and used Yellen’s emergency BTFP and the Fed’s discount window to reprogram and win the Kobayashi Maru.

Well played captain…...

Mike

Jerome Powell reprograms SVB BBQ to win Kobayashi Maru