It will be Enough, even if Too Much

by
Marc Chandler
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Business travel commitments keep me from updating the blog until the weekend, but I wanted to share a few thoughts post-Fed. 

First, the Fed was more hawkish, and the median dot sees 125 bp increase in the target rate in Q4.  The hawkish thrust was also evident in projecting that the target rate will remain higher for longer.  Even in 2025 sees the target rate above the longer-term (neutral) level.   

Second, the market still does not fully accept the Fed's message. The unemployment rate (pain) peaks at 4.6% in 2023.  This seems optimistic given the weak growth it project.  It revised down this year's growth to 0.2%--stagnation--from 1.7% in June.  Next year's growth is seen better at 1.2%.  The projections for the PCE deflator have it remaining above 2% in 2024 while the Fed funds target rate is expected to be cut.  

Third, much to the dismay of Fed officials, the Fed funds futures market continues to price in a cut late 2023.  Specifically, the implied yield of the December 2023 Fed funds futures contract is 23 bp below the yield of the September contract.  All but one of the Fed's "dots" for the 2023 is lower than what is implied by the swaps market.  Powell says that whatever the Fed does it will be enough to push inflation to return to the target.  The market responds by saying the Fed is underestimating the magnitude of the tightening it is enacting, with the past hikes not completely working through the economy.  The pace of the balance sheet unwinding is accelerating.  

Fourth, the dollar rose on the back of the Fed's move and projections. While it may consolidate in the very near-term, the dollar's advance may not be over, but the signs of late cycle behavior are beginning to accumulate. Imagine what a weak jobs reports could do to the bipolar Mr. Market that swings between seeing the dollar a structural decline and seeing it ruling the roost. When Bitcoin was around $60k, some fretted about what it said about the dollar.  Now, I heard one business television anchor ask if sterling, which fell to its lowest level since 1985, was an emerging market currency.  Others ask if Europe is investible.  Some even argue that there is no alternative to the dollar.  In my experience this kind of mind set is also part of the broad carving of a dollar top.  

Good luck.