We need more inflation!
Nov 4, 2021
–The Fed began the process of tapering as the Treasury also announced cuts in auction sizes. The taper doesn’t cut the size of the Fed’s balance sheet, it simply reduces the pace of growth. Powell seemed somewhat uneasy in his press conference yesterday, again saying that the case for rate liftoff has not been made according to employment. He also implicitly made the somewhat tenuous case that inflation is not due to wage gains and is therefore transitory. Steve Liesman asked a great question about the risk tradeoff between putting 5 million more people to work at the margin versus accelerating inflation, which hurts ALL Americans. Powell at first attempted to say that we’re not in a Phillip’s Curve situation where there is an actual trade-off, but then noted that there are times of tension between those two goals (of stable inflation and full employment) and it comes down to risk management. That was Liesman’s question in the first place, are the risks of more inflation affecting everyone becoming greater than adding jobs. Powell sidestepped it. I would note that at the onset of the last two tightening cycles in 2004 and 2015 or 2016, the unemployment rate was higher than it is now (4.8%) and trended lower as the hiking progressed. In some ways I think Powell would just like to throw up his hands and say, “Look, the only way out of this mess is to inflate out of it! THAT’S why we can’t raise rates from zero.”
–Yields rose somewhat on the day, with tens +3.3 bps to 1.58% and the 30yr rising a similar amount to just under 2%. Eurodollars were down 3.5 to 5.0 from reds to blues. There was decent put activity in EDM2, most notably a new seller of about 50k 9925p at 5.0. EDM2 settled 9958 or 42 bps, vs the current libor setting around 13-14 bps. The market is currently comfortable with the idea that the first hike will come immediately after taper’s end. The only one-year calendar to post a new high was EDM2/EDM3 which rose 3.5 to 82. Implied vol again eased in treasuries with TY down at 4.3.
