WisdomTree Minds on the Markets
Minds on the Markets
Minds on the Markets
ARCHIVE: March 13, 2023
Dazed and Confused
Do you ever get the feeling that the more the Fed speaks out publicly, the more inclined the markets are to experience challenging conditions? Last week’s Semiannual Monetary Policy testimonies to both houses of Congress certainly seemed to underscore this point.
Let’s go back in time for a moment. For those of you who may remember, there was a time when the Fed was not the “open book” it has seemingly become. Yes, public appearances and testimonies occurred, but official “forward guidance” was not really a consideration. In fact, we remember a time when the policy makers didn’t even communicate what the actual result was from an Federal Open Market Committee (FOMC) meeting. In order to determine if any potential rate action had occurred, let alone the magnitude of such a move, market participants had to figure it out for themselves based upon the Fed’s open market operations and whether or not money needed to be added or subtracted to the banking system. The end result would ultimately be confirmed after the fact.
That brings us back to last week’s appearances by Fed Chairman Powell and the attendant market reactions. There is no doubt the two key takeaways from the Fed Chairman’s testimonies were: the policy makers are prepared to increase the pace of rate hikes if needed, and the ultimate rate peak is likely to be higher than expected. Both of these revelations from Powell ran explicitly counter to the markets’ narrative from earlier in the year when the overarching themes were not only that the Fed was close to ending this rate hike cycle but that rate cuts could possibly come sooner rather than later.
While these headlines certainly grabbed our attention as well, they got us thinking, specifically on the first point. Why would Powell open the door for a potential 50-basis point (bp) rate hike at upcoming FOMC meetings? The Fed had already downshifted from 75-bp to 50-bp and then 25-bp increases. Why not just raise rates by quarter-point intervals for a longer period to get the terminal rate where it needed to be?
With Powell reinforcing how data-dependent future policy decisions will be, opening the door to a return to half-point rate hikes only added to the overall confusion. The Treasury market’s responses to the jobs data to end the week certainly emphasized that point. The news surrounding the beleaguered Silicon Valley Bank (SVB) only heightened the remarkable turnaround in pricing activity not only for Treasuries but, once again, rate hike expectations, as concerns about potential bank stresses came to the fore.
Just when you think you may have figured out how this tightening cycle is going to end, it seems as if Fed-speak throws you for a loop. Unfortunately, we don’t think the landscape will be changing anytime soon. The genie is officially out of the bottle. Maybe we could dream of a simpler time, say before the mid-1990s or before transparency became all the rage.
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