There Will Be No Dovish Pivot At This Week’s Fed Meeting

The prospect of a dramatic pivot is growing. A surge in stocks heading into Wednesday’s FOMC meeting eases the odds that the Fed will change its course. If anything, the stock market reacts to the past week provide further evidence as to why the Fed may show no signs of backing down.

Just look at what has happened in the week since the WSJ story broke on the morning of October 21. The S&P 500 is up nearly 7%, while the Dow Jones Industrial Average is up nearly 9%. The only reason the Nasdaq didn’t outperform was due to risky earnings and guidance from tech-heavy mega-caps.

Return to Basics

Everything comes back to the basics, the economy. The Fed is supposed to send monetary policy through economic activity. The money needs to keep the economy low if the Fed has any hope of cooling and reducing inflation. The Chicago Fed National Financial Conditions Index (NFCI) and the adjusted NFCI are close to the neutral zone, below 0. When the reading is above 0, it indicates that economic conditions are hindering the economy, and when they are below 0, they are. with financial support.

The data shows that economic tightening leads to slower GDP growth while economic contraction leads to faster GDP growth. The data shows that it may take several months of economic crisis to reduce GDP growth. Economic conditions have not long been prohibitive for a recession in economic growth. The third edition of nominal GDP shows that the economy is growing at an adjusted rate of 6.7% per year, the highest increase compared to the previous decade.

Things are starting to soften

For now, the Fed is unlikely to risk conditions easing back into accommodation, and there are signs that things are starting to improve. The CDX Markit High Yield Index fell to the same level on August 26 during the Jackson Hole meeting. Meanwhile, the index rose, heading to Jackson Hole versus today’s decline.

Additionally, the ICE BofA AAA US Corporate Index Option Adjusted Spread has declined since mid-October, and the move has only intensified in recent days.

These are just a few signs of economic slowdown in the past week, which would indicate that if the Fed could show a change in policy at this time, it could lead to an increase in the economy. This, in turn, means that the Fed’s job of reining in inflation will be difficult and take a long time.

The Chicago Fed’s NFCI and modified NFCI have seen some softening recently. Combined with the bond market spreads above it suggests that there may be another downside this week.

November’s Dangerous Meeting

The most alarming part of the November FOMC meeting is that there is no summary of economic indicators. This leaves the Fed with nothing to give the market to see where the Fed sees rates going next year. If the Fed shows a reduction in interest rates from December at the November meeting, it could signal that the Fed is nearing the end of its pace. This can do more harm than good as it can lead to high prices, instability, and economic decline.

In July, when the Fed said it believed it was neutral, the stock market reacted strongly to the August meeting because the market thought that the currency was close to the end of its travels.

The best scenario would be to not give the markets any chance at the November meeting and let the market speculate. Signs that nothing has changed since Jackson Hole and a corresponding price hike may be in order. If there should be a change in the riding style, let’s come to the December meeting. The Fed may challenge the signal of small movements in the future with its “dot plot”. Meanwhile, the Fed could raise its rate on the “dot-plot” for 2023, say, 5%, and force the effort to keep the rate in 2024 back home.

It will send a clear message to the markets that slow inflation does not mean low inflation or low prices.

Hopefully, the Fed has learned from its July mistakes.