Today the Federal Reserve’s FOMC (Federal Open Market Commission) increased the overnight lending rate by 0.25%.
Which brings the overnight rate to the range of 4.75% - 5.00%.
Table of Contents
Predictions & Rate Decision
Predictions
Rate Decision
Press Conference
Market Impacts
Conclusion
Internal References
1. Predictions & Rate Decision
Predictions
(I’m leaving this section in whether its right or not just to give a picture of my thought process in the 30 minutes before the meeting)
It’s 12:37 pm, I’m listening to Bloomberg Live and reviewing some of the things I’ve said before on this matter and I’ve been struck by something.
A pivot from Powell will send a horrendously large message to the markets.
The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.
-Jerome Powell
Thinking on this for a moment and thinking about what I expect from Powell, I suspect the following will happen. The Federal Reserve will hike rates by 0.25% and may cite the separation principle if asked directly about the rate hike during the press conference. For those of you unaware, the separation principle is the concept that the Fed’s monetary policy will be targeting inflation, while the Fed’s activities through their swap desks like the BTFP will be targeting the turmoil in the banking sector.
Essentially they believe they can do two opposite things at the same time. In the short term, they certainly can, and it will allow them to at least maintain the narrative that they are still fighting inflation (despite pumping hundreds of billions of dollars back into the markets each week).
Truly, the goal for Powell is to make it look like they are not prematurely loosening policy, and I think this will be their primary goal with this press conference and rate decision
Looking at Bitcoin price we see it has just barely approached and rejected our upper target of $28,810. My expectation for price into this meeting is for price to dump upon the announcement of a 0.25% rate hike. We will likely see some more market structure form in the No Mans Land price area, and for those of you looking for entry points I expect us to get retests of the $24,898 support level and hopefully we can get some more price structure in this area and more opportunities to DCA in the $25k area.
Rate Decision
We got a 0.25% rate hike as expected.
Their official statement can be found here.
While we wait for the press conference, let’s dig into the official statement and see what we find.
The U.S. banking system is sound and resilient.
That’s it. Other than that there are no surprises in this announcement. QT will continue at the same pace it has. The RRP rate offered is still positive compared to the overnight lending rate and interbank rate, so liquidity will stay within the Reverse Repo facility.
There was no dissent among voting members and the FOMC is projecting the overnight lending rate to reach 5.25% by the end of the year. Essentially they are forecasting just one more 0.25% rate hike this year.
Powell’s statement is in the video below.
Powell starts out the initial statement he gives by acknowledging the turmoil in the banking sector but downplays just how widespread the issue is by stating it was only a few banks. It’s almost every bank, but most of them were able to take the loss on the chin.
Late in his statement, Powell says the following.
As a result, we no longer state that ongoing rate increases will be appropriate to quell inflation. Instead we now anticipate that some additional policy firming may be appropriate.
This statement is a large deviation from the previous meetings and implies that the Federal Reserve thinks they have achieved the neutral rate. They are claiming that they’ve done enough to fight inflation. They are giving themselves a green light to stop raising rates at future meetings.
This makes sense considering they can’t just pivot without a narrative to present the markets. If the Fed doesn’t present a narrative, the markets will find one. And in terms of a pivot, the last thing they want is for the markets to come up with a narrative.
Even so, the markets are still finding their own narrative anyways.
The Fed may state that credit tightening has the same effect as a rate hike, but that’s not true and no one really believes that. The Fed essentially wants you to believe that despite the US Government being the largest borrower in this space, private credit tightening while public debt doesn’t is somehow the same thing.
They want to tighten the screws for the public and for businesses while easing up on the federal government. It’s an interesting way to spin this phenomenon and I give credit to them for trying to craft a narrative but there is something going on here that you all need to be aware of and it starts with a question.
Why are you here?
Why are you reading this? Have you ever stopped to think about that? This specific substack. How did you get here? Is it because you have a deep and avowed interest in the sovereign debt markets and bid/ask spreads on treasuries? No (Well, probably not, I don’t know you). You’re here because central banking activities have taken center stage in the public’s eye.
I spoke on this behind the paywall on Sunday’s post, but I’ll re-iterate it for you now on the free side. Very similar events happened at the end of the last credit tightening cycle in 2019, and nobody paid attention. I posted about it on Instagram in October of 2019 and the gravity of the event was mostly lost on people. It took another 6 months for the credit market itself to blow up and for the Federal Reserve to go into a full pivot. Even after that, it took months for the markets to really find themselves and start buying risk assets. People just weren’t paying attention back then. They didn’t care. And because of that, there was a lot more leeway for everyone to react and adjust to it before retail traders figured out what was going on.
That is not the case now.
You’re here because you have an idea that this is important. I’m not here to belittle you or your comprehension. You might have a very good idea of what’s going on or a very loose idea of what’s going on. But you know that it’s important enough to be worth your time and your money (if you pay).
You’re not alone.
The vast majority of retail is watching. This is one primary reason why each credit cycle speeds up. In 2008, it was very esoteric, few people really knew what was going on or why it mattered. In 2019 it was far less so and quite a few of us who had started paying attention after the rush into QE and the ensuing currency war were able to spot the obvious tell in 2019. Now it’s 2023 and it feels like everyone and their dog is watching the FOMC meetings and the Fed’s balance sheet. Everyone is aware of what’s coming and what it means.
The Fed no longer gets to just make up a narrative and have the markets go along with it. Just as regular journalism has had its crisis and loss of confidence among the general public, the same is true for financial journalism. When we are told things that run counter to common sense and our lived experiences, we no longer believe them just because they are “experts.”
In my eyes, an expert is someone with the performance to back it up. That’s it. I don’t care if you went to Harvard or dropped out of school at 13 to sell crack. I’m choosing based on the results. This is the one thing that academics fear the most, having to compete with everybody. The greatest desire of an academic is to only compete with their peers. In much the same that a male high school wrestler does not want to have to fight the one girl who joined the wrestling team. It’s a lose-lose. You either beat the girl and people give you a hard time for not being a gentleman. Or the girl is a good wrestler and you get clowned for losing to a girl. Lose-Lose.
Similarly, a Harvard economist wants to only be in competition with a Yale economist. They then get to say “no one could have predicted this.” The last thing they want is for Tucker Carlson to be replaying an interview with his local mechanic from 2 years ago predicting the exact thing the experts said was impossible.
This is the academic’s greatest fear. Do you think Mike Tyson was afraid of anybody? He didn’t care where they trained or how big they were, he knew he was the best. The fact that our academics shrink back from an honest competition in the marketplace of ideas says everything you need to know about them.
I often frame crypto as the WNBA of money. This serves more purpose than simply saying that we need to build our fan base. This is also how others see us, and it’s how we need to see ourselves before we can truly compete and win. There is no one who belongs on the wrestling team more than the girl who knows she doesn’t quite fit in with all of the men there. She pushed through that wall and put herself there anyways. We will also have to overcome the walled gardens of experts and expectations to put ourselves on the wrestling team. It certainly helps that the boys on the team aren’t any good, but we still need to prove ourselves.
We are the girls, shaking up the boys club of money.
They will all fall before us.
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