Fed's 2023 Special, BoE Thinks Negative

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The FOMC decision and communication were in line with expectations. There were tweaks to incorporate average inflation targeting and the 2020 growth estimate was boosted. Markets expressed some disappointed when the Fed didn't offer any hints at more QE or other easing, except to say that it retained tools in the toolbox.

The short-term market reaction is understandable but it's ultimately the long-term vision that will win out. The Fed's 2023 forecasts and dots were all new. They showed 4.0% unemployment, 2.5% GDP growth, 2.0% core PCE inflation and 13 of 17 policymakers said they still expected to have interest rates at zero at the end of that year.

Ashraf tells me to start focusing on US 5-year break-even rates (now at 1.55%) and a possible H&S formation in this little-noticed rate. 

Forecasts change but the Fed's vision is clear: There will be no rate hikes even when the pandemic is forgotten and the economy is relatively strong. The 2023 economy that Powell laid out is similar to what we saw in 2019 – a year with 2.2% growth, 1.7% inflation and 3.7% unemployment. The big difference is that the Fed funds rate was 1.5% and the Fed's balance sheet was half its current size.

The picture the Fed paints of 2023 is paradise for risk assets, emerging market currencies, precious metals and commodities. It would argue for massive leveraging at ultra-cheap rates.

In the shorter term, there are undoubtedly mixed messages. The August US retail sales report missed estimates with core sales down 0.1% as the prior was also revised lower. At the same time, home builder sentiment jumped to a record and a US HHS official said the country could be vaccinated in April.