What: Powell and FED is being pushed by market – this is analysis of WHEN has financial condition tighten too much?
Answer: another 1 standard deviation decline in financial conditions
Action: Await Fed signal (and begin to position once the Answer is triggered)
Trends: EURUSD had broken lower, another layer of Gold support broken, US yields testing YTD highs
Yesterday, I wrote that it is far too early for the Fed to act on yield curve control, a message the market was clearly not prepared to hear, as equities and treasuries sold off heavily when Fed Chair Powell essentially shrugged off the recent rise in treasury yields as only something that “caught his attention”. It should not have been such a surprise, as Powell is following the script that the Fed has to follow – that it will only act due to financial market considerations on a material decline in financial conditions, one sufficiently large to threaten the fulfilment of their dual inflation/employment mandate.
The most interesting set of comments yesterday from Chairman Powell on WSJ webinar were these:
“I would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals,” Mr. Powell said Thursday. He added that the Fed is looking at “a broad range of financial conditions,” rather than a single measure.
This makes clear that Fed policy will be driven by Financial Conditions – and Bloomberg has a useful measure of US financial conditions, shown below. As the graphic shows, conditions are still positive and would have to decline about 1 standard deviation to about -0.50 from the current 0.40 to get to their worst levels since recovering from the pandemic reaction last spring. That level was just before the US election, by the way.