Today the Federal Reserve’s FOMC (Federal Open Market Commission) increased the overnight lending rate by 0.75%.
Which brings the overnight rate to the range of 3.75% - 4.00%.
Table of Contents
Rate Decision
Press Conference
Market Impacts
Preparing for a Pivot
Internal References
1. Rate Decision
Earlier in the week we discussed the narrative surrounding Uptober that caused most assets to pop ~10% during the last week of October. This narrative was almost entirely driven by expectations of what the Federal Reserve would discuss after this November 2nd FOMC meeting. Which meant a few things, but the primary thing that it meant is that the market action was fairly flimsy and could be reversed if statements did not support the Uptober narrative. In general, people buying in to flimsy narratives should push for an exit once flimsy profits are achieved. And this isn’t a dig, 10% in a week on spot price can amount to significant profits on leverage, it’s nothing to sneeze at and can present a profitable week if you know what you are getting into ahead of time. But this isn’t how generational bottoms are set, nor is it how long term bottoms or even mid-term bottoms are set.
A rate increase of 0.75% to the overnight lending rate brings the Overnight lending rate to a range of 3.75%-4.00%. For those unfamiliar with how this works, it would be incredibly difficult for the Federal Reserve to hold the overnight lending rate at a specific number, so instead each rate hike instead always establishes an upper and lower range. So long as market actions keep the lending rate within the range, the Fed will not intervene. When rates stray outside of the range, the Fed intervenes, simple enough. When we discuss the last pivot later in this article we’ll also cover what happened in 2019 when the overnight rate was severely broken.
The Fed released an official statement and Powell led the press conference with an initial statement mirroring the official statement.
The Uptober rumor that caused the degens to pile in stated that after this month’s 0.75% rate hike that the FOMC would consider decreasing the rate at which the rate hikes were occurring. You’ll note that in the official statement there was no hint of this whatsoever.
The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
People who think the Wall Street Journal is going to leak anything consequential are fooling themselves. This is how the Fed uses the tail to wag the dog. People who know better and know that the first sign of a pivot will be the Fed cutting the Overnight Reverse Repo rate are still susceptible to this because a lot of people involved in the markets have tied their identities too closely to market activities.
A question needs to be asked.
“Who are you during a bear market?”
Many people formulate their identities during bull markets. It’s easy to be a trading genius, wonderkid, Macro-Analyst, etc. when markets are running. People are always looking for themselves in everything around them.
Is your self-identity and self-worth tied to a bull market?
Is it tied to a lifestyle that is unsustainable when everything is down?
Do you identify yourself in your portfolio with gains and a big green number?
What you’re seeing now are people eager to regain whichever piece of their self-identity is tied to the markets. Everybody knows we are waiting for a Fed pivot, and yet we watched people pile in to meet a WSJ narrative before the pivot had even occurred yet.
Who are you?
Forget about markets for a second, this is even deeper than that. Take away someone’s job, or the role’s through which they identify themselves and most people become lost. You go out and socialize and typically the first question people ask when they meet you is some version of the following “Who are you” or “What do you do?” Most people are socialized through the labels given to them by society, and through those labels they give themselves value.
You might attach yourself to a few of them. Doctor. Father. Engineer. CEO. Author. NFL Player. Etc. We discern our value from these labels. We tell people stories about our labels, or at times our labels tell the story for us. Often times you can find that individuals can have minor identity crises when they lose a label they became attached to. Think about how many people you knew who dropped out of school but were unable to easily swap the label student for dropout. Or how many people lose a job but might feel uneasy telling a spouse they were fired that day. Or how many people may have gone through a break-up or divorce and hesitated to tell their parents they would be visiting alone this Thanksgiving. Labels provide a convenient story for those around us so that we can often avoid some of the more difficult questions about life. The truth is that nobody has any answers for what we’re doing here or why, but when you introduce yourself at a networking event it’s far easier to say “I’m an accountant,” than it is to say “It’s been 27 years and nobody has quite yet told me why the sun rises every morning.” Rather than attaching yourself to whatever label you can to ease your restless mind, instead find comfort in no-label. It makes bear markets far easier to sit through, especially with the mental stillness required to be a legitimately good trader. People want the label so bad that they’re willing to lever up on rumors. They want to be able to look back at 3pm on Friday and see a green week so that when someone asks them what do you do, they can have an answer.
So? What did you get done this week? Sometimes the best answer is “nothing.” And if you can’t live with the version of you that gets nothing done, then find something to distract you that will not destroy wealth. One secret you learn after a few market cycles is that when you get near the secular lows and highs of the market cycle, that is when people lose the most money. It’s not when markets are trending, it’s when the market direction is beginning to become unclear. It’s when people are fighting to hold on to a short term identity rather than letting it flow off of them like water off of a duck.
Nothing has changed within the macro just yet. The sun will not set for you, nor will it rise for you. It will rise when it’s time, and its up to all of us to find meaning within the world as we wait for it turn.
If this didn’t sink in, pay close attention to Powell’s words at the end of the statement. One day the courage of the FOMC will fail, and they will cave to pressure from the treasury and outside forces, but that is not this day.
The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.
-Jerome Powell
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