Intraday Market Thoughts

What’s Expected From the Fed

by Adam Button
Nov 3, 2021 15:05

The best laid plans of mice, men and central bank officials often go wrong. Yesterday the RBA abandoned its once-iron clad commitment to yield control and keep rates at zero until 2024, now it's the Fed's turn to wrestle with forces beyond its control.  Moments ago, the Oct ADP survey on private sector jobs jumped from 523K to 571K (vs exp 400K) and the Oct services ISM blew out all forecasts to hit a new record. Here are some of Ashraf's tweets regarding the Fed & the structure of the yield curve. There are some trading ideas he has in mind for after the Fed announcement. 

What’s Expected From the Fed - Tweet Pre Fed Usd Nov 3 2021 (Chart 1)

The plan was perfectly laid out and communicated over a series of months in an attempt to fight the last war: the taper tantrum. Powell and his deputies laid out the case for a taper of $15 billion month beginning in November and running through June followed by a period of reflation on rates.

The period of reflection has already been scrapped and Fed funds futures are pricing in a rushed taper in order to hike in June.

The main question is whether the Fed opens the door to taper flexibility and how much that's emphasized. In doing so, Powell could add more volatility to future decisions with flexibility or by taking a hard line, reduce it.

In Australia, we saw a slow climb down on prior dovish communication. That's the general trend in central banking and Powell will no doubt be worried about rising inflationary pressures. He will be asked about the transitory narrative and is likely to stick to it, but he will need to be convincing.

Alternatively, the Fed could engineer a tactical retreat by shifting to a $20B/month taper. That would be a hawkish surprise but given the counter-intuitive and volatile moves in FX recently, we hesitate to wade in.


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