Communication -the “forward guidance”- should go to winter quarters. However, the promise of silence did not last at all. “I see very few signs, if any, that inflation has peaked,” said Fed Governor Michelle Bowman. Actions. Mary Daly and Loretta Mester led the singing voice. The message: “We are not in a recession.” James Bullard, the main hawk, hit the note by resurrecting another thesis -Thomas Sargent’s in “Poincaré and Thatcher’s Methods” (1981)- that postulates the possibility of a credible disinflation, which is quick and not very harmful. “There is not going to be a recession in the US,” Bullard risks. But no one got to the point like Neele Kashkari, a customary pigeon. “Is there a recession? I don’t mind. I am focused on the data on inflation and salaries. And inflation continues to surprise us with its increases. Salaries continue to grow. The guidance is intense. “Inflation did not go down at all”, Mester dixit. “The fight against inflation is nowhere near its conclusion,” Daly said. Thomas Barkin detailed that inflation will subside, but “not immediately, not suddenly and not in a predictable way.” After the sermons, the news of the job shower broke. And the drop in the unemployment rate was revealed to 3.5% (helped by a drop in labor participation, and with an average salary increase of 5.2%). The labor market fully recovered its pre-pandemic levels. Full carton.
Don’t fight the Fed. Wall Street knows the mantra and doesn’t challenge it. Unlike in the past, he doesn’t need Powell’s cavalry to come to his rescue but not to get distracted and annihilate inflation. However, he prefers a different interpretation of reality. If there is no contraction, so much the better for the Stock Market. But the bear market opened in January, the recession is already internalized. How to explain the S&P 500 rally (13% from lows) given the sustained pruning of earnings projections? If the recession is mild it will also be helpful. It is the bonds that really disagree with the official situation. That there will be no recession? The inverted curve asserts the opposite. And after the employment report was invested even more. That inflation did not go down, that it did not make a ceiling? The ten-year rate, yes. And he backed down on account. In June it had crowned 3.50%. It closed Friday at 2.80% (increased 10 bps on the employment numbers). How serious is this counterpoint? Less than it seems. The Fed raised rates 150 bps in June and July, and long rates cut 70 bps. That’s credibility to the Sargent. A revulsive marriage would be that of recalcitrant inflation with markets in ruins. It’s true: the Fed didn’t want (real) Treasury Index Bond (TIPS) rates to sink below zero but it reversed quickly. At the moment, you don’t need much more. And when it is the case, it will let you know.
Source: Ambito
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