The FED has not Chickened-out

I watched yesterday’s Q&A session with Jerome Powell and he looked confident. For the first time in 2022, Powell’s words were projecting aggressive hawkishness, nor was his tone of voice. It was a refreshing upgrade from his very harsh choice of words, during the January, March and June meeting and Senate testimonies.

Just like when working with kids and trying to get them to do your bidding or to finish their plate, if you can inspire confidence in them and charm them, you’ll have a far better chance of getting the desired outcome.

Powell’s conviction comes from the fact that gasoline prices have been sharply down, but as winter rolls around the corner in Europe in 90-120 days, their use-and-abuse relationship with Putin might inflate prices again.

I agree with him that the coming CPI numbers will be much improved, compared with the 9.1% reading we had that really creamed market expectations that inflation peaked.

The issue the markets have with Powell is that he is admitting to a slowdown and doesn’t want to EVER call a recession… if we get two back-to-back GDP contractions, for him those are data points, not cause of completely rearranging his policy.

The mere fact that he is admitting a slowdown is visible made markets go supersonic, as Wall Street now expects that September would be the last (if at all) 75bps hike, but more analysts see September as just a 50bps hike, which means that frontloading is over.

Just by turning a bit more dovish and allowing markets to hear him say that the hardest part is behind us (weather or not you agree) unleashed a massive buy program:

Courtesy: Zerohedge.com

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    Before we call the bottom on the markets, even after yesterday’s insane move higher, keep in mind that all previous rate hike decisions were followed by massive one-day rallies: Today: +4.3%, June 15: +2.49%, May 4: +3.41% and March 16: +3.7%, but they gave most of the gains up the next day.

    We believe that this pivot, along with Powell’s recognition of more softness in the labor market and in the general economy, has been a real turning point for the dollar.

    We believe gold is seeing right through and is already rallying, but the move will get stronger!

    Courtesy: Zerohedge.com, Bloomberg

    The Fed unanimously hiked rates by 75 basis points to a range of 2.25%-2.5%, in line with expectations, which is a great sign that, within the organization, everyone likes the policy right now.

    The FED’s policy is obviously adapting itself to the Russian-Ukraine war, a major catalyst of inflation.

    What does all of it mean?

    It means that the FED has been able to get us back to the December 2018 interest rate levels, without causing a paper tantrum.

    It means the FED has more options and more tools, if a sharp slowdown were to occur.

    It means that the global economy was able to absorb these aggressive changes and it means the FED is no longer well behind the curve.

    These are bullish signs and we’ll see how Wall Street trades it, but the risk profile in the economy has certainly improved.

    Best Regards,

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      A good friend of ours spent two hours in the company of a Formula 2 racecar driver yesterday. He sat him in front of his rounded screen inside of a simulator that is designed in a similar position to that of a racecar. He then put up a racetrack in Austria, a real-life circuit, and asked him to lap it.

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