If there is a recession, the funds rate will be at 3% in no time.
-Steven Blitz, TS Lombard Chief Economist
Intro
Authored by GoldFix ZH Edit:
Steven Blitz, Chief US Economist for TS Lombard and someone we respect and read here carefully has a post-FOMC report out. In it, he lays out the moving parts and market biases based on yesterday’s pronounced behavior, for the next 6-12 months surrounding Fed behavior. Here is our interpretation after a study of that report. (Plus Hartnett turns sociologist??)
Contents
- Report Conclusions
- Powell’s, Yellen’s, and Market Biases
- Fed Knows Higher Bond Yields Doing Job For Them
- Powell Implies Bigger growth with even less inflation now
- Economic Slowdown Momentum is Receding
- Market Behavior Again Thinks The Fed Will Ease.
- Yellen Now Doing All She Can to Stave Off Recession
- For The Next Quarter, The Treasury Will Borrow Less, Spend More
- Fed Hopes for More Growth, Less Inflation
Report Conclusions:
On Hiking:
The Fed will not hike again unless inflation pops above 4% or if the Long Bond yield drops back to where it was which re-accelerates housing.
Inflation popping above 4% seems unlikely in the next 6 months as the pipeline is currently full of disinflationary forces
Bonds retracing all their losses would make them nervous however
On Easing:
The Fed will not ease unless Unemployment goes above 4% with an accompanying recession
The Treasury’s behavior going forward does the easing for them
On Recession vs. Inflation:
While there is a chance of recession in Q4, the more likely scenario is not that Powell’s (bigger growth with more disinflation) new idea will not happen, but rather we get a re-acceleration in growth in 2024 with 4%+ inflation back in the pipeline.
Powell’s, Yellen’s, and Market Biases:
Based on what Powell said, the market’s reactions, and the slated actions on deck for Yellen’s Treasury: We will have an accelerated growth rate without disrupting disinflationary forces (return of Goldilocks)— market agreeing with the Fed’s pitch.
The Fed will not raise anymore, and is despite (or because of) the above statement, will ease— That is not the message the Fed was conveying. The market ignored the Fed’s tough talk
Yellen’s Treasury is just now set to facilitate Economic recovery — by saving less and spending more next quarter. If Long Bond yields decrease too soon (The Fed wants them to stay up to kill inflation and slow down housing) the Fed is more likely to hike again— The market ignored this yesterday
Powell hopes for autopilot headed into the 2024 election The Fed is now putting forth an opinion that real economic growth is going to accelerate even while disinflation stays— This is a new projection the market loved. The greater likelihood is growth to return with 4%+ inflation— provided we do not get recession in Q4.
If recession does happen (as unlikely as it seems statistically speaking), and if in combination with higher unemployment, “Fed funds will be at 3% in no time”.— which means if the fed does anything ( hike or ease) the next 6 months, it ends with inflation.
For The Next Quarter, The Treasury Will Borrow Less, Spend More
"Treasury’s financing policy for Q4 aims to alleviate its burden on markets and, in turn, growth
— within the parameter of having to finance the government. They announced a net raise of $776bn versus $1trn in Q3 and plans to end the year with $750bn in the TGA, a $100bn reduction (1.5% of GDP). The current TGA level was boosted by California tax payments delayed from April to October because of weather and now November, though most paid in October. December is a big month for budget receipts (corporate tax payments and personal estimated tax payments), and these should come to $435bn, toss in the oddball receipts and Nov tax payments from CA and this puts the year-end TGA at $1,425bn, before taking money out. Budget outlays should total $1,450bn in the quarter and the net funding raise is $776bn. In round numbers, the math nets out to Treasury borrowing less and taking down the TGA by $100bn to finance the government – a marked reversal from Q3 dynamics. One could say the Treasury is making use of the extra funding from the late California tax payments. To me this is more excuse than reason. Treasury does not want its funding dynamics running headlong into the Fed’s planned reduction in SOMA and pushing the economy into recession. If late tax payments are the excuse to borrow less and take down savings, they will take it – and did.
Black Swan Comment: Yellen is doing her best to make sure the economy is doing well going into the election while banking on Powell to not ease anytime soon. Wouldn’t it be a kicker if he did ease and let inflation rage?
Continues here ...
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