Fiscal policy is a wild card- for the Fed to assess, as that's clear from both the Fed Statement and 'Presser' reflections. The Fed's view of labor markets needing to soften trivializes the pressures that 'really' contribute to inflation.

Freepik

Regardless, it looks like softening (rate cuts) next year at a slower pace with a higher long-run Funds Rate down the road. Possibly 3 to 3.5 is realistic as far as the so-called 'neutral rate'. Implications are mixed, but generally very tepid towards easing, after being too high too fast for too long and before that, way too low for too long past any need to be that easy.

What the too-long low rate policy did was adjust the U.S. economy to those metrics, and now you get the opposite, though 5% rates in the real world are pretty normal and liveable for business (that's why as anticipated there wasn't a heavy economy decline). I call that the basis for a 'softish' landing baseline.

Chairman Powell seems to not trust the economic and inflation trajectories. In the phrases he used it sounded like the Fed became 'more' restrictive for next year as he withdrew a couple 'possible' rate hikes economist speculated for. If the direction of travel is more hawkish without more hikes, it still repressive to economic activity, growth and consumer optimism to say the least. He has a chance for a 'soft' landing, and he's trying not to abort that prospective. The odds-on call will be the Fed is done, which is where I think they should be.

'Market X-ray'  

One needs to be prepared to be surprised going forward this time of year, and with Oil prices as a wild card for inflation-related policies too, as this Fed does not grasp how Oil impacts inflation more than monetary policy.

Freepik

Powell repeatedly said they will pause and watch things 'carefully'. He admits that QT continues to happen, and he upgraded the forecast for next year, as the S&P behaved as usual.. trench warfare that resolves in the direction of the initial move, which in this case was lower (post the rate held in place). Public interest expense creates bond supply too, and compels lifestyle adjustments for a lot of people, that impacts lots of company earnings, and while unreliable data prevails, lots of this is still impacted by crosscurrents like Oil prices. This alone (Oil) is probably why Powell downgraded prospects of rate-cuts soon.

Hence a wait-and-see attitude on the Fed's part, and that's basically it. This is the period of time where heaviness should inflict pain, I sense already is being seen, but not enough to apparently get sufficient Fed attention. So, pain.

By the way today’s planned meeting between Biden and Israeli Prime Minister Benjamin Netanyahu on the UN General Assembly sidelines, was hardly well noticed, but might be very important as relates to a three-way relationship of security concerns between Israel, Saudi Arabia and the US, including a range of challenges (the Saudi civilian nuclear ambitions, Israel's stable security with assurance as Iran gets closer to a 'big bomb', and thwarting Russian ambition ... the latter relating to an 'axis of despots' they they're trying to build).

The Fed is mostly barking at this point. They will have to let the Genie out of the bottle soon, and this Genie did expect they wouldn't hike (they didn't) and they would talk hawkish (they did), and they also don't know that's justified. In a sense you had a psychological reaction magnified by clear 200-DMA failure. Also, this wasn't the day's biggest story, perhaps UK's energy policy shift was.

There is uncertainty about Fed policy lag, and Chairman Powell characterized the situation as holding rates, reducing securities holdings, and bringing down inflation (again he fails to admit it's Oil and the Dollar, not just the Fed). Still thinks another rate hike is feasible this year. Yes, but it should not happen.

He wants to see more progress against inflation before reaching conclusions. Well that's fair, but again presumes the Fed is the arbiter of price targeting for now, which impact is lessened. He sure didn't admit they were the problem all the way back to coming out of the 'emergency' of the pandemic after it ended.

A bigger story might be Ford (F) saying that the UK Climate Plan involving more than EV goals, but undermines Ford's business plans, which require moving to broad EV use to justify the capital expenditures Ford has made. Ah ha...well if consumers have their way, the 'ban' of gas-powered cars will spread to the USA, and while 5 year delays may not mean much to Mother Nature, what is clear is that the infrastructure isn't broadly ready. Also, more expensive without removing range anxiety has been and remains a non-starter. Hmm... UAW will be thrilled if Ford does slow or reverse their plans, so much friction ahead.

If broad rollback catches hold in this Country (a move we've mentioned would finally reverse a duplication of what China tried, what we suspect Washington wants with high Oil / Gasoline prices), well, various pushbacks are out there. Bans would be delayed anyway I suspect, we'll see if that slows EV adoption. On the other hand it will help companies going into solid-state batteries which also tend to be more efficient (Silicon Carbide inverters too) and longer-range.

Bottom-line: 

The Fed Chairman 'tried' to say he's not going to commit 'timing' of another hike, or the next point of cutting, but the time 'will certainly come'. I was pleased that a couple reporters at least implied counterproductive actions by the Fed, which is primarily concerned about restoring 'price stability'.

There is (I agree) much uncertainty about estimates a year in-advance. He's expecting inflation to move lower in a sustainable way. Probably not thinking about rising Oil prices, Auto-strikes, Government shutdown risks, weather or other extremes, China's warlike preparations via-a-vis Taiwan, and so on. Of course, besides that, production, economic output, and many, many uncertainties, as far as Fed monetary policy ahead. However, I think rates are topping.

The Fed Chairman must know there's a lag effect, so he sort of straddled the high-wire given their inability to see far ahead or the impact of Oil prices. He's expressing his latitude and while markets don't like it, I do understand it. I've had zero upside targets for anything short-term and observed more landmines than goldmines prevail, with mega-cap vulnerability persisting as well. This is also nearly the time of year where money-managers will gradually nibble a bit at under-priced (including small-caps) that are pummeled, while realizing that tax-loss selling will help move stocks into the buying areas they want for '24. It may be that hedge fund experience of being too negative in 2023's first half is not going to be repeated in 2024, but of course, a lot is pending until then.

More By This Author: