Pro Perspectives 10/19/23



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October 19, 2023

Jerome Powell spoke today at the Economic Club of New York.

For some context, below is what has happened in the interest rate market since the Fed’s September 20th meeting, where they maintained the forecast for another quarter point HIKE this year, and removed two rate CUTS from their forecast for next year.

As you can see, that Fed meeting was the lift-off catalyst for the 10-year yield, to the tune of 64 basis points.

This rise in yields has taken stocks down as much as 5%.  It’s pushed mortgage rates to new 23-year highs.  And it forced the Bank of Japan back into the currency markets to defend the value of the yen on October 3rd.

With that, coming into today’s commentary from Powell, we should have expected him to talk about the tightening of financial conditions that has taken place in the interest rate market.

Indeed, near the bottom of his prepared remarks, there it is:

Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.”

That’s the market doing the work for the Fed, which should make it very clear that the Fed has nothing more to do (in this tightening cycle), unless inflation ramps again.

That said, in the Q&A, he did say that he did NOT think policy was too tight right now.  That sent stocks lower, and 10 year yields up.

That’s a perplexing statement.  But there was a lot of conversation that lacked measure, in the Q&A.

He also said that perhaps the rise in the interest rate market is the market recalibrating to the view of “economic resilience.”

If that’s the case, the inverted yield curve, which was reflecting a view of recession, should de-invert (to reflect growth, confidence and a healthier economy, i.e. lower short-term rates and higher long-term rates).

And maybe it will.  We may have a clue in the way the market closed today.  While the 10-year yield rose to 5%, the 2-year yield reversed on the day, closed lower, and put in a technical reversal signal (an outside day).