Market Snapshot March 17, 2021


Good Wednesday AM on hopefully this best day of the week,


The Fed will release its policy statement in about 20 mins. Fingers and toes crossed Mr. Powell will calm markets. It is a 50/50 proposition right now.


Dan Rawitch shared a good piece on how we got here (1.67 on the 10-yr and mortgage bonds off 300bps from just a month ago):


“Bonds are absolutely hammered this morning as last-minute panic selling hits the fixed income markets. This is NOT about inflation. This spike in rates began as the FED went silent and refused to address things as they were beginning to uptick. The problem was made MUCH worse when two knucklehead Fed Vice Chairs stated the rising rates are a good thing and that they are rising because the economy is so good. This contradicted Powell’s last several statements, yet he did NOTHING to correct those statements. Next we had Jelena McWilliams FOOLISHLY state that SLR should not be extended. Again, Powell did nothing to correct this. These bonehead statements that went uncorrected by Powell have caused the market to believe that Powell has checked out and/or is asleep at the helm. The market knows that without the FED stepping in, things will get a lot worse, specifically around the SLR requirements which will force top tier banks into dumping a trillion or more-dollar value of bonds into the already ill liquid markets. Todays Fed meeting is one of the more important meetings of my career. I would say at least it is in the top five that I can recall. Fingers crossed, today is a very big day. Let’s hope Powell finds his words again.”


And Bloomberg shared:


It’s Fed day. Given the macro picture has brightened so much in the last few months, thanks to stimulus and reopening optimism, and since yields have risen fairly dramatically, it’s one of the most anticipated meetings in recent times.


Here’s two paragraphs to help think about the challenge for Powell & Co. today.


First, here’s Conor Sen in Bloomberg Opinion, explaining that for the Fed to truly stick with its dovish message, it also needs to be optimistic.


…the Fed should be every bit as optimistic about growth as the market has been, while still sticking to its script on the timing of any rate increase. Only by meeting or exceeding the optimism of investors while retaining its current policy stance can Powell persuade investors that he’s determined to let the economy run hot in order to achieve the Fed’s objectives.

In other words, it’s one thing to say “the economy is just so so, and so we’re not going to raise rates until 2023 or beyond”, but if you really want to demonstrate your mettle to the bond market, it’s way more powerful to say: “The economy is going to boom in 2021 and maybe even 2022, but we’re still not going to raise rates until 2023 or beyond.”


Meanwhile, there will be a lot of focus on Powell’s press conference, and whether he “pushes back” at all at the rise in rates. When given the opportunity a few weeks ago during an interview with the WSJ, he didn’t give any inclination to talk down rates, let alone introduce new rate suppressing policies. That being said, the Fed does have subtle communication tools it can use to indicate to the market just how long it will be before it plans to hike rates.

In a recent Q&A here on central bank challenges, Jon Turek of the Cheap Convexity newsletter explained:


The problem the Fed and other central banks have had recently is markets are discounting their thresholds, especially for tapering asset purchases, which is so crucial in a sequencing sense. So I expect to see more language like we saw last week from the Fed, that pushes back and adds qualifiers to “substantial progress.” I.e. Last week we heard Brainard talk about “maximum inclusive employment”, and Clarida talk about looking past just U3 to define “substantial progress.” This is how the Fed gets back onside with the market, because the market is looking at Goldman’s call for a 4 handle U3 by year-end and saying that should equal “substantial progress” and now the Fed is saying, well, maybe not. That is important language that I think has been a bit overlooked recently by the market.


Basically, by emphasizing how far the economy still is from full employment, beyond just the headline U3 measure, Powell can drive home how patient the Fed is willing to be, even against the backdrop of nominal improvements.


So there you have it. Watch to see if the Fed is willing to demonstrate its dovishness by getting more bullish on the short-term GDP trajectory. And listen to see the degree to which Powell emphasizes how much work is yet to be done in the labor market to truly bring the benefits of a strong economy to everyone.


Please remain safe and healthy, make today great.