Following on last night's "February 2022: Credit Suisse' Zoltan Pozsar Says The Fed Has To Crash The Market" featuring another alumnus of the New York Federal Reserve Bank (Mr. Pozsar was on the Markets Desk where he mapped the shadow banking system (literally. here's FT Alphaville's founder, Paul Murphy, with Zoltan's four-foot map).
Today, we have two selections chosen by FT Alphaville's new editor, Robin Wigglesworth, in the Further Reading linkwrap:
First up, Bill Dudley writing at Bloomberg, April 6:
Its hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, itll have to inflict more losses on stock and bond investors than it has so far.
Market participants heads are already spinning from the rapid change in the outlook for the Feds interest-rate policy. As recently as a year ago, they expected no rate increases in 2022. Now, they foresee the federal funds rate reaching about 2.5% by the end of this year and peaking at more than 3% in 2023....*****....So far, the Feds removal of stimulus hasnt had much effect on financial conditions. The S&P 500 index is down only about 4% from its peak in early January, and still up a lot from its pre-pandemic level. Similarly, the yield on the 10-year Treasury note stands at 2.5%, up just 0.75 percentage point from a year ago and still way below the inflation rate. This is happening because market participants expect higher short-term rates to undermine economic growth and force the Fed to reverse course in 2024 and 2025 but these very expectations are preventing the tightening of financial conditions that would make such an outcome more likely.Investors should pay closer attention to what Powell has said: Financial conditions need to tighten. If this doesnt happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower.
....MUCH MORE between the ellipses.
And from Jesse Felder at The Felder Report, also April 6:
The Fed Just Disengaged Its Volatility Suppression Machine
The Fed minutes released today reveal the central bank intends to start reducing its balance sheet by as much as $95 billion per month beginning in May. Investors ought to pay very close attention to this development because, for a very long time now, the Fed has effectively used its asset purchase program to suppress volatility across a variety of markets including the equity market. When the Fed has removed this volatility dampening system in the past, it has regularly led to a series of rolling ructions in the broad stock market. The most recent of these was the 2018-2020 period which began with the Volmageddon episode and ended with the Covid crash upon which the Fed reengaged its volatility suppression program in a massive way.....
....MUCH MORE
Our outro from last night's post:
Keep an eye on volatility as the Fed's preferred tool to destabilize portfolio assets.
Not original to me, just a re-capitulation of what Zoltan was saying two months ago.
