The Fed

Key takeaways

  • Hold rates near zero
  • End bond buying by March
  • Raise rates “soon” (which means March)

Our thoughts

We’ve written (and spoken, in our client conversations) about the Fed’s hawkish pivot, in which Powell made his intentions to progressively remove accommodation incredibly clear, all the way back in November.

And now, as the market comes to digest this reality, perhaps a fraction later than EMH would suggest (a joke at the clinical hand of the efficient market hypothesis) we see a marked uplift in volatility.

The Fed presser makes it clear that this vol is intended, (our take, this repricing is expected) and in no way will deter the Fed from pursuing the dual mandate. It is an entirely expected outcome, on the path to normalisation of R* with R (the equilibrium interest rate, versus the actual interest rate, that is consistent with GDP at potential).

It is also interesting to note the potential for somewhat higher mortgage rates, from the text below. There is little immediate impact to us, or our positioning, but it could slow the US housing market, which would have some eventual DAA implications.


But just keep in mind that we are in the zone of “a hike at every meeting”, given that the tolerance for additional above-expectation inflation prints has now reached zero, and that also brings into play the dreaded “50bps” prospect, the sort of move that Larry Summers has been advocating for, to shock markets out of what he regards as a form of complacency.

[nb, for those interested, our relationship to Larry and his views can best be described as unstable, but he has called the inflation story quite well].

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