FOMC To Provide “Advance Notice” For November Tapering; May Deliver Two Potential Hawkish Surprises
At the conclusion of tomorrow’s 2-day meeting, the FOMC is likely to provide the promised “advance notice” that tapering is coming, paving the way to announce the start of tapering at its November meeting, writes Goldman referencing a recent trial balloon by the WSJ which effectively reached the same conclusion.
As we reported last weekend, the bank’s standing forecast is that the FOMC will taper at a pace of $15bn per meeting, split between $10bn in UST and $5bn in MBS, ending in September 2022, although one possible alternative is for the Fed to accelerate the pace of tapering and cut each month instead of each meeting, thereby concluding its bond buying by next July.
As Goldman’s David Mericle writes, “while the start date now appears set, the pace of tapering is an open question.Our standing forecast is that the FOMC will taper at a pace of $15bn per meeting, split between $10bn in UST and $5bn in MBS, ending in September 2022. But a number of FOMC participants have called instead for a faster pace that would end by mid-2022, and we now see $15bn per meeting vs. $15bn per month as a close call.”
Specifically, Goldman expects that the September FOMC statement will include language similar to that used in July 2017 to foreshadow the start of balance sheet normalization at the next meeting. For example, it might say something along the lines of, “The Committee expects to begin reducing the pace of its asset purchases relatively soon, provided that the economy evolves broadly as anticipated.” Separately, Goldman does not expect the FOMC to reveal the pace this week, though the minutes to the September meeting might eventually provide a clue.
Moving down the list, the Fed’s Summary of Economic Projections is likely to incorporate the recent stagflationary shifts in the economy, namely the large upside surprise to inflation and the large downside surprise to GDP growth over the last few months.
As Goldman shows in the chart below, the bank’s 2021 GDP growth forecast has fallen over 2pp on a Q4/Q4 basis since June, and we expect the FOMC to cut its 2021 projection substantially as well.
Some more details here:
Exhibit 3 shows that our GDP growth forecast for 2021 on a Q4/Q4 basis—the measure that Fed officials include in their projections—has come down by over 2pp since the FOMC’s June meeting. Both the disappointment on 2021Q2 growth and our downgrade to our 2021Q3 tracking estimate largely reflect the impact of supply chain disruptions on US production, especially auto production, which has resulted in a large drawdown of inventory to meet current demand. The Delta variant has also weighed on further recovery in the service sector, though the August retail sales report suggests that the impact on total consumer spending is likely to be more limited than we had initially feared.
These delays in rebuilding inventory and reopening consumer services imply somewhat stronger growth in 2022, though the path forward for consumer spending now looks more difficult because government income support has dropped off and the remaining depressed service sectors, mainly very high-contact and office-adjacent services, are unlikely to recover rapidly during the winter virus season.
As for the Fed’s core PCE inflation projection for 2022, it is expected to remain stable at 2.1% in keeping with the Fed’s narrative of “transitory” inflation, with some participants forecasting greater inflation momentum into next year and others forecasting more payback for stretched prices this year (Goldman expects the core PCE path will peak at a slightly higher 2.2% further ahead).
Away from tapering, Goldman warns that the dots are an even closer call because a single participant could tip the balance upward relative to the bank’s forecasts, which are shown in Exhibit 6. For 2022, only two participants would have to add a hike for the median to show a half-hike and three for the median to show a full hike. But the best guess here is that most of the potential marginal voters who could swing the balance are Governors at the Fed Board, and they are likely to join Chair Powell in submitting a no-hike baseline. After all, as Mericle notes, “it would be surprising if Powell showed a hike next year just weeks after his dovish speech at Jackson Hole reiterated his view that inflation pressures are likely to be transitory.”
In light of the above, Goldman expects the median dot to show no hikes in 2022, 2 hikes in 2023, and 3 hikes in 2024, anticipating that a quarterly pace of tightening back toward the neutral rate will be appropriate if everything goes well. While this would put the dots well above market pricing, Goldman does not expect much of a market reaction because the dots are a modal forecast corresponding to an economic baseline in which most participants will assume that the conditions for tightening will be met. They are not directly comparable to market pricing, a probability-weighted mean of a range of scenarios, including many in which the Fed would not hike. Moreover, Goldman rates strategists recently showed that markets have tended to put little weight on the Fed’s three year ahead dots in the past.
In a slightly different take from Standard Chartered’s Steven Englander, he expects the dots will signal one 2022 hike (vs no hikes according to Goldman), and two added hikes in both 2023 and 2024. Specifically, he expects seven FOMC participants to indicate two 25bps hikes in 2022 – five a single hike and six no hikes. The median is a single 2022 hike, but with a hawkish lean given so many participants pointing to two hikes. There is a risk that the hawkish 2022 skew could be even more pronounced, “but we do not think the 2022 dots will show a two-hike median. We estimate that about 18bps is priced by end-2022, somewhat low given what we expect”
While Goldman is generally sanguine about tomorrow’s FOMC, the banks concedes the bank catuions that risks to its expectations are tilted in a hawkish direction (more below). Some Fed officials have expressed greater concern about inflation recently, reflecting stronger wage pressures, increases in some short-term measures of inflation expectations, and the possibility that supply chain disruptions could last well into next year, as even the Fed realizes that inflation at this point is anything but “transitory.”
The two most likely hawkish risks according to Goldman would be
- if the FOMC reveals next week that it intends to taper at a faster pace or
- if the 2022 median dot shows a hike.
However, client surveys suggest that the majority do not view either of these as the base case, meaning that either would be hawkish surprises to current market expectations, prompting a selloff and as everyone knows, that’s what the Fed will avoid at all costs. The Fed leadership has historically preferred to avoid delivering hawkish surprises at FOMC meetings to the extent that it can, preferring the information to be priced in advance (like it did with the WSJ leak last weekend). While the dots are sometimes out of the leadership’s control, in this case we think it can probably prevent either of these two potential hawkish surprises from materializing this week.
The Gaslighting Of America
The Gaslighting Of America
Authored by Bob Weir via AmericanThinker.com,
I remember a comedy skit several years ago in which a woman comes…
The Gaslighting Of America
I remember a comedy skit several years ago in which a woman comes home unexpectedly and finds her husband in bed with another woman. Shocked, she demands to know who the woman is and why her husband is doing this. The couple get out of bed and start getting dressed as the man says to his wife, “Honey, what are you talking about?” The wife, perplexed at the question, says, “I’m talking about that woman!” Meanwhile, the other woman, now fully dressed, heads for the door. The husband says, “What woman? Honey, are you feeling okay? There’s no woman here.” Feeling dazed and confused, the wife begins to question her own sanity.
That’s a pretty good example of what the Biden administration is pulling on the psyche of the American people.
What they’re doing is not merely “spin,” which has become SOP whenever a political party does a clever sales job on the public in order to keep certain facts from them. No, this is much more than shrewd marketing; this is blatantly lying in the public’s face and telling them they’re crazy if they believe their own eyes.
When we look at videos showing thousands of migrants coming across our southern border with impunity, while Biden and his cohorts tell us they have the situation under control, we’re being gaslighted.
When thousands of Americans and Afghan allies are abandoned to be tortured and killed by Taliban terrorists, while Biden’s press secretary, Jen Psaki, tells us the war ended successfully, we’re being told not to believe what we’re seeing.
President Trump made our country energy independent, only to have his success overturned by Biden on day one of Biden’s presidency. That forced our country to once again be dependent on foreign oil. Biden said his action would help protect the environment. We scratch our heads and wonder how it makes sense to ship millions of barrels of oil on cargo ships from thousands of miles away, only to be used the same way it was used when it was processed here.
Does foreign oil have less environmental effect than American oil?
When Biden proposes a $3.5-billion “infrastructure bill” that is heavily weighted toward social engineering and radical “Green New Deal” initiatives, we’re told that everything is infrastructure.
We’re also told that the massive spending bill will cost “zero dollars” because the new taxes will be assessed only on the wealthy.
Then, to add more consternation to a public getting groggy trying to keep up with twelve-digit numbers, Biden and his accomplices want another $80 billion for the IRS so its agents can check into every bank account that has transfers of $600 or more. As if the IRS weren’t already a liberty-crushing organization, Biden wants to provide it with more ammo to use against those who oppose him. Nevertheless, we’re told it’s going after only tax cheats. Why would these people need $80 billion more to do what they’ve always done? Don’t ask, lest you get audited for questions they don’t want asked.
When the supply chain of cargo ships, carrying about a half-million shipping containers filled with goods from all around the globe, are stalled in the waters outside major American port cities, we’re told by White House chief of staff Ron Klain that it’s just “high-class problems.”
In other words, only the wealthy are waiting for the goods to arrive at stores. Moreover, Jen Psaki mocks it as the “tragedy of the treadmill that’s delayed” — another elitist poking fun at the reasonable expectations coming from the working class.
The list of gaslighting incidents is growing longer than Pinocchio’s nose.
Each time we are faced with another destructive lie, our attention is diverted to the latest Trump investigation or the probe of one of his supporters. Keeping the January 6 imbroglio alive is one of those diversions. The radical left has come to power by a sinister display of distractions from reality. A major part of that distraction is using accusations of racism to muzzle opposition. Most people will cower in fear of such labeling, even when they know in their hearts it’s not true. That’s precisely what makes the accusations so useful to those who seek power through intimidation and distortion of reality.
President Trump called out situations for what they are, without the odious and murky filtration of political correctness. That’s why the entrenched powers of Deep State corruption despised him.
Now we’re stuck with a president who says “what inflation?” as we pay higher prices than ever at the gas pump and the supermarket. I seriously doubt that shoppers are questioning that reality.
The U.S. Budget Deficit
#CKStrong The U.S. Treasury findly released their monthly statement on Friday, which closed the books on the government’s 2021 fiscal year (October to…
The U.S. Treasury findly released their monthly statement on Friday, which closed the books on the government’s 2021 fiscal year (October to September). The deficit came in at $2.8 trillion (12.0 percent of GDP, based on our Q3 GDP estimate) , a bit lower than FY 2020’s $3.1 trillion (14.8 percent of GDP). Those are some massive deficits, folks.
U.S. Deficit Larger Than 95 Percent Of Global Economies
In fact, the FY 2021 deficit was larger than Italy and Canada’s economy, bigger than 185 of the 192 country economies in the lastest IMF database. Take a look at the peak 12-month deficit of $4.1 trillion in March. The March deficit would have made the G5.
Financing The COVID Deficit
How can the U.S. Treasury finance $5 trillion in borrowing over the past 18-months without spiking global interest rates, crowding out investment and other asset markets, and tanking asset prices? They can’t.
The table below breaks down the financing in several different measures. Check it out.
The bottom line is that 23 percent of the COVID deficit borrowing has been financed by an increase in Treasury bill issuance, easy given the mass excess liquidty on the short-end where the Fed is soaking up over a trillion with overnight reverse repos in order to keep short-term rates postives. Most of that liquidity, by the way, was created from QE.
Of the remaining $4.1 trillion of non T-Bill debt issuance, 75 percent was taken down by the Fed, albeit indirectly.
There you have have it, folks, T-Bills and the Fed have financed the bulk of the COVID deficit and debt buildup. No judgment, but policymakers are now going to have engineer a soft landing in the economy and asset markets as we approach a fiscal cliff to normalize the budget deficit and tighten up monetary policy.
We are not throwing stones as they saved the world from a global economic castasophe.
We do criticize their continued irresponsible policies as inflation rages and stagflation sets in. It’s not wise, in our experience, to try and monetize supply shocks. We learned that hard and painful lesson by doing so with the OPEC oil shocks.
Narrow window for a soft landing. Stay tuned.
Email us or comment if you have questions.
An Anti-Inflation Trio From Three Years Ago
Do the similarities outweigh the differences? We better hope not. There is a lot about 2021 that is shaping up in the same way as 2018 had (with a splash…
Do the similarities outweigh the differences? We better hope not. There is a lot about 2021 that is shaping up in the same way as 2018 had (with a splash of 2013 thrown in for disgust). Guaranteed inflation, interest rates have nowhere to go but up, and a certified rocking recovery restoring worldwide potential. So said all in the media, opinions written for everyone in it by none other than central bank models.
It was going to be awesome.
Straight away, however, right from the very start of 2018 there were an increasing number (and intensity) of warning signs. Flat curves were a big one – which then later inverted. In global economic data, crucial contradictions were purveyed by Japan and Germany.
In other words, taking cues from those three – Japanese and German conditions augmented by consistent contortions in the US Treasury yield curve – before we even got to the end of 2018, while the mainstream narrative prevailed unopposed with Jay Powell still hiking rates, we said very differently. Here’s early November 2018, with already negative GDP in both those places:
This year is proving to be a trainwreck in too many important places. It was supposed to be the arrival of worldwide recovery. Worse, too many arrows are still pointing down for 2019. But you wouldn’t know it from the Bank of Japan, ECB, Federal Reserve, etc. Not until they are forced into some honest assessments for once.
Heads in the sands (or another orifice, if you prefer), “tightening” became the preferred if only option across the globe. The Fed, the ECB, others around the world rushed to get ahead of the (imagined) inflationary pressures “everyone” said were on the cusp.
Just a few months further on, March 2019, everything had already changed though it would take many more months for the stunned mainstream to even begin appreciating all the roughness.
As is standard practice, when weak data began showing up last year it was attributed to anything, everything else. Europe was downright booming, they said, so there was no possible way for a macro negative scenario…Europe isn’t the only place where manufacturing declines are showing up. Just as Germany is a bellwether for global trade and therefore global economy, Japan is in very much the same situation. Export-oriented, if Japan Inc. isn’t making new goods that’s because the rest of the world isn’t demanding them.
Germany. Japan. Yield curve. Twenty-eighteen.
Germany and Japan the economic bellwethers for the whole global economy (the importance of trade at the margins) along with the Treasury curve reacting to, and forecasting ahead from, the real global economy’s interior and insides. Economists are, by contrast, so removed from the realities of real-time facts so as to be modern day astrologers making claims based on little more than specious privileges.
Germany or Japan struggling isn’t really about Japan or Germany; nor the UST curve specific to US and Treasury. With a massive overflow of goods heading toward especially the US, however warehoused on the way, as I wrote earlier today, what might this trio bode with regard to the direction for future demand?
Many companies have claimed they are absolutely ready for “too many goods”, believing both their newfound penchant for individual supply chains as well as logistical consulting to manage more than ever. This so long as demand doesn’t “unexpectedly” fall off, even a little, which then might trigger the downside of the inventory cycle.
Three years ago, these three indications taken together were keen warning signs how demand was about to and would fall off “unexpectedly” (if it hadn’t already). And these ended up being highly accurate measures of the global economic direction that were completely, utterly contrary to the surefire, guaranteed inflation/recovery/BOND ROUT!!! no one ever challenged.
Is this time different? Hope so, but history keeps repeating because no one ever explains what happened last time. And the time before. And the time before. And…
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