Macro Monkey Says
The Day of Days
Paraphrasing the classic American film Dodgeball, today is set to be bigger than the Super Bowl, the World Series, and World War II combined.
That’s right; it’s JPow day again. After 7 long, hard weeks of useless guesses on the Fed’s next move plaguing Twitter and CNBC seemingly ‘round the clock, JPow can finally put a stop to all this madness (for now).
As I write this, markets are calling for about an 87.1% shot of a 25 bps hike to occur later today or a few hours ago, depending on when you wake up (no judgment).
With some quick math, we can infer that markets may have priced in a hike of 21.78bps, essentially, and could certainly act accordingly depending on our economic overlords’ decision.
Going by implied probabilities, there are two scenarios that could play out, and with that likely, a big bag of volatility along for the ride. For most of the past 7 weeks, the ship had been sailing pretty smoothly, all things considered. Then, SVB pulled a nasty prank on the global sector, and well, you get the point.
Now, it’s anyone’s guess. But let’s at least go over the two scenarios and what could be rolling around JPow’s dusty, old skull.
Scenario 1: 25 bps hike
Powell & Co. stay the course. If the Fed raises by 25 bps, this will be the most glaring sign yet that JPow is willing to throw market dynamics to the wind in order to trample this beast called inflation. It would be the Fed’s “read my lips” moment, one way or another.
If JPow is willing to stare down a banking crisis partially caused by his rate-hiking escapade and fearlessly continue to jack it up, he’ll be a confirmed gangster and could cement himself a Volcker-like reputation.
Then again, the guy could still wreck the entire economy with additional hikes, so we can’t be too sure. The point is that the sign this scenario would send to the markets would be unmistakable and resolute.
Scenario 2: No hike
Less likely, as guided by market-implied probabilities, is the no-hike scenario. It would be the Fed’s “mom, come pick me up; I’m scared” moment, not one way or another.
This outcome currently has about a 12.9% chance of occurring, so it’s not like Mr. Market is throwing a whole lot of weight behind this view. The belief might be there, but the implications sure would be as a no-hike day would tell the market one thing: JPow’s worried.
I mean, alongside an ongoing crisis of confidence in the banking sector, the absolute last thing behavioral economists would tell you that’s needed is concerns stemming from the Fed. It might help quantitatively, but far from it psychologically.
Further, victims and would-be victims of potential further bank runs are low-key already doing Powell’s job for him.
At the end of the day, the Fed simply seeks to tighten up lending conditions by lowering the amount of liquidity available to be lent, or lent cheaply, at least. Customers, both big and small, from banks to brokers, have been rotating from checking and sweep accounts into similarly safe instruments that banks can’t lose for you: money market funds.
When you take your deposits out of a checking account or sweep program and move it into a money market fund, you are taking cash that banks would otherwise loan out and essentially investing it yourself. This act alone tightens liquidity by reducing the base of deposits that can be lent out, thus having a similar effect (in theory) as rate hikes themselves.
JPow might be a Zeus-like figure from sea to shining sea, but never forget who really controls the economy (or 70% of it, at least): the consumer. Tune in at 2 pm (or go rewatch the video, again, no judgment).
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