Breadth Thrusts & Bread Crusts: Confessions of a Fed-Watcher

JC Parets
September 23, 2021

From the desk of Willie Delwiche.

I'll admit it. I'm a Fed-watcher from way back. I enjoy it as much as anyone, and probably more than most (especially those within the All Star Charts community). 

While I never had to analyze the weekly money supply numbers to figure out what the Fed was doing, I've remained attentive as the Fed has revamped its mode of communication with the market time and again.

The latest iteration -- a written statement and press conference after every FOMC meeting coupled with summary economic projections released four times a year -- reflects the Fed's desire for transparency. It also supports the belief that forward guidance is a powerful tool at a time when interest rates are stuck near zero.

Market participants listen, absorb the message and the forecasts, and react. We did this dance again this week.

Here’s the latest batch of forecasts from the Fed:

The Fed-watcher in me was struck by a couple of things:

  1. The Fed now sees weaker growth for 2021 than what it expected just six months ago. Forecasts are usually best taken with a grain of salt, but the Fed seems to be having an especially challenging time getting an accurate read on the pulse of activity in the current environment.
  2. The Fed has totally missed the surge in prices this year and its 2021 forecast for inflation is now twice as high as it was coming into the year ("No sh*t", according to my ASC colleague Sean McLaughlin). While still paying lip-service to the view that this is transitory, FOMC members are moving up expectations for rate hikes.
  3. This year and over the next few years, the Fed is expecting growth and inflation to be above their longer-run levels and by next year the unemployment rate is expected to be below its longer-run level. Yet there is no path expressed for interest rates to get back to their longer-run level. This strikes me as a conundrum, but then I remember that according to Keynes, by the time we get to the long-run, we will all be dead. So maybe it doesn't matter.

The market participant in me tunes that all out and looks at what's happening with bonds:

Yields for both the 10-year and 2-year T-Notes are on the cusp of breaking out. That tells me the market is starting to look through the forecasts and comments about transitory inflation and is getting ready for higher interest rates going forward. 

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