https://open.substack.com/pub/themacrocompass/p/dont-fight-the-fed?r=yit2r&utm_medium=ios&utm_campaign=post

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Hi all, and welcome back on The Macro Compass.

In this piece we are going to cover the Fed meeting and its implications for markets.

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The Fed Meeting Explained

To explain what happened today with the FOMC meeting, we need a short step back.

The latest US CPI release materially surprised on the downside: both headline and core inflation rose way below the expectations of 65 out of the 67 (!) economists surveyed by Bloomberg.

Powell recently divided inflationary pressures in 3 main categories:

• Core goods: supply bottlenecks combined with the pandemic-related binge spending led to hefty core goods inflation, but the Fed understands this category will suffer from disinflationary pressures ahead and it’s not where its focus lies;
• Housing-related: Powell knows negotiated rents are cooling down, but he also understands housing-related CPI will take a while to reflect these trends; the Fed likes shelter inflation lower, but it can only wait and see;
• Ex-housing core services: the stickiest inflationary components that the Fed can directly influence via a weaker labor market and lower wages = this is what must go convincingly down.

The latest CPI print showed ex-housing core services pricing cooling further: its annualized 3-month rate of change is now rapidly dropping towards 2%. Markets interpreted this as the ultimate dovish signal, and sent bond yields sharply lower and equity prices higher in a typical ‘‘Fed pivot’’ move.

After all, if the stickiest components of the CPI baskets are showing signs of cooling this must be a green light for the Fed to be more confident they’ll achieve their objectives and hence loosen up?