Good Morning on this best day of the week, Wednesday,
It is Fed Day.
All Fed decision days are important (and all move markets) but this one feels just a bit more important than the previous ones. The ten-year is now up against the second level of Fibonacci; we only held the first level for a few short days. The yield is currently 3.59 and if it does not hold here, it will rise to 3.71. Mortgage Bonds are hovering just below the level that I had hoped it would hold. Of course, none of this matters with the Fed on deck.
The question is whether or not bringing the banking industry to the verge of collapse is enough for Mr. Powell to tone down his destructive behavior. We will know this answer, not so much by the rate change, which most believe will be 25 bps, but by his positioning for the future. We need a dovish Fed to put this rally back on track. If the Fed surprises us with no rate increase, expect a massive move in the right direction. I believe the market has priced in a 25 bp increase, but not a 50 and not zero. As you know, I have never been a fan of floating through FOMC decisions, so be careful. This could very well be the Fed meeting the ignites a rally, or it could carry the ten-year all the way back to 4%
Nick Timiraos (the WSJ reporter who seems to have the inside track with the Fed) shared…
The Fed faces one of its thorniest policy decisions in years: whether to lift interest rates again to fight high inflation or hold them steady amid the most intense banking crisis since 2008. The central bank will announce its decision at 2 p.m. ET, alongside new interest-rate and economic projections. Fed Chair Jerome Powell is set to answer questions from reporters at 2:30 p.m.
- The case for raising rates: Before the collapse of Silicon Valley Bank two weeks ago, officials were set to debate whether to raise rates by a quarter-point or a half-point because of signs the economy was running too hot. Some economists argue that stopping rate increases now risks fueling unacceptable risks that inflation will stay higher for longer.
- The case for holding steady: The banking turmoil creates risks of even more rapid tightening in financial conditions. Goldman’s chief economist, said he expected the Fed not to raise rates this week because of risk-management considerations: tightening too little would be an easier problem to fix than tightening too much.
- Forward guidance: Fed officials can use a suite of tools—their policy statement, rate projections and Mr. Powell’s press conference—to provide more nuance about how their economic forecasts have shifted, how the risks around them have changed and what that means for the likely path of rates. How officials describe the most likely path could be as important as their rate decision on Wednesday.
Another (big) shoe ready to drop…
A record number of commercial mortgages expiring in 2023 is set to test the financial health of small and regional banks already under pressure following recent bank failures. Regulators and analysts are growing increasingly concerned about commercial real estate debt, particularly loans backed by office buildings that lost value as businesses adopted remote and hybrid workplace strategies during the pandemic.
Please remain safe and stay healthy, keep fingers crossed for the FOMC decision, and make today great!