Message shift from immediacy to duration
September 8, 2022
–WSJ article by Timiraos suggesting Fed will hike 75 in two weeks had the effect of flattening the curve. FFV2 settled 9697.5 (-1), nearing the 9692 price which would occur on 75 bp move. Greens and blues rallied over 10 bps. The ten year note yield fell 6.7 to 3.263. In an environment of much tighter financial conditions, longer yields give a nod to slower econ conditions.
–Brainard’s speech was somewhat disingenuous, starting out by blaming inflation on supply shocks and then crediting monetary and fiscal policy for ‘growth’. (Take the credit, not the blame). She did mention tighter financial conditions, reduction in the balance sheet, and the risk of over-tightening. In summary, she cited several factors which should continue to moderate price pressures but cautioned against pulling back too soon. The important message from both Brainard and Powell has been duration of tight policy to prevent a backslide, NOT a need to continue near term aggressive hiking. Clearly a hike will occur at the Sept 21 meeting, but there has been little in the way of explanation about effects of the large increase in balance sheet reduction. Brainard simply mentioned it, and Bullard said he “hopes” it results in higher rates, sort of in the same way that I “hope” gold will rebound.
–ECB today, followed by Powell. Jobless Claims expected 235k.
