Macro Digest: FOMC Preview: Biggest meeting this year (Data vs Vision of monetary policy needs to be resolved)

 

FOMC meets tomorrow to revise its Fed Dots and projection for the economy & it could be the most important meeting this year (and last three year) as we have reached level of yield which is beginning to hurt the economy, but without Federal Reserve looking to pause. Combine this with this week break higher in energy prices and we have two very strong forces taxing the consumer (Price of money + Price of energy) or as I tweeted earlier:

 

 

 

 

The market is very bullish on change and higher DOTS – I remain somewhat skeptical as the recent Beige Book is very defensive and on the border of being dovish….

I did words count on the Beige Book:  Moderate, moderately mentioned 97 – ninety-seven times! Hardly work of bullish reading of economic activity…?

Having said that I do realize data could be less relevant as the discussion will be on technical factors like Terminal Rate and as such is more of an academic discussion on vision of "normal" and "exit" strategy

 

Conclusion:

 

Tomorrow's meeting and the potential change of FED Dots can change short-term outlook for all asset classes – The odds of a RISK OFF is rising into this event.

 

 

 

We consider tomorrow meeting critical for a number of reasons which I will try illustrate through charts:

 

·        Critical discussion – What is the "terminal rate"? (The rate at which the economy is balanced and humming – not too cold / not too hot)

·        Governor Brainard – a neutral in FOMC has changed her tone: She sees the recent fiscal expansion as potentially raising the terminal rate, which means Fed DOTS could rise in 2019 and 2020.

·        Fed right now thinks "terminal rate" is somewhere between 2.65 and 3.50. An increase in terminal rate will move FED Dots into "restrictive monetary policy" medium and long-term and could lead to further rate increases

 

 

2 Year US government YIELD – and – FED Funds upper corridor (Fed funds @ 200 BPS vs. 2Y "money"  @ 283 BPS

 

 

 

Fed DOTS as of June, FOMC meeting (Note how a rise in FED dots for 2020 will move "policy" to restrictive….

 

 

·        Market based technical outlook:

 

 

10 Year US interest rates – broken top from 2013/2014…..

 

 

 

 

 

US 30 Year Future – long-term (Monthly).

We have been in downtrend since late 2017 and now closed to oversold.

 

 

 

 

 

US 30 Year futures – Medium term (Daily chart)

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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