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August 14, 2017 By Peter Boockvar

Dudley is reminding us again of what’s most likely to come


Quantitative Tightening

If you had doubts about whether the Fed would begin quantitative tightening in September because of the recent inflation figures, NY Fed President Bill Dudley, a key member of the troika, is telling you AGAIN that it’s coming. He said “I think we’re still on the same trajectory we’ve been on for several years. Above trend growth, gradually tightening labor market, inflation (somewhat below our objective) but we do expect as the labor market continues to tighten, to see firmer wage gains and that will ultimately filter into inflation moving up towards our 2% objective.” On the tightening of the labor market he added, “a pretty broad range of evidence suggests the labor market is quite a bit tighter than it’s been in many years.”

The Fed is comfortable with beginning QT because “It’s been I think generally well received, and fully anticipated. People expect it to take place.” This gets to my point I’ve made that if I’m going to punch you in the face but gave you a month’s notice and hugged you after, would it hurt any less. The Fed seems to think so and the market right now seems to thinks so too.

To all those who yell about how the Fed won’t hike again because of the recent low inflation stats, Dudley said this as reason to continue to “gradually remove monetary policy accommodation:

“1) monetary policy is still accommodative, so the level of short term rates is pretty low, 2)and this is probably even more important, financial conditions have been easing rather than tightening. So despite the fact that we’ve raised short term interest rates, financial conditions are easier today than they were a year ago.” The underline is mine. “The stock market’s up, credit spreads have narrowed, the dollar has weakened, and those have more than offset the effects of somewhat higher short term rates and the very modest increases that we’ve seen in longer term yields.”

Thus, markets have rallied themselves RIGHT INTO ANOTHER RATE HIKE assuming current conditions come December. Herein lies the Fed’s conundrum, if markets sell off after QT, the market would sell itself AWAY FROM ANOTHER RATE HIKE. Pick your poison. Notice the market feedback loop the Fed is now on with the Goldman Sachs Financial Conditions index now a key indicator of theirs?

In response, the 2 yr yield went to the high of the day as did the 10 yr yield. The dollar is also at the high of the day vs the euro while stocks are unperturbed.

Filed Under: Central Banks

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About Peter

Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.

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Disclaimer - Peter Boockvar is an independent economist and market strategist. The Boock Report is independently produced by Peter Boockvar. Peter Boockvar is also the Chief Investment Officer of Bleakley Financial Group, LLC a Registered Investment Adviser. The Boock Report and Bleakley Financial Group, LLC are separate entities. Content contained in The Boock Report newsletters should not be construed as investment advice offered by Bleakley Financial Group, LLC or Peter Boockvar. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. The views expressed in this commentary should not be taken as advice to buy, sell or hold any security. To the extent any of the content published as part of this commentary may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. No chart, graph, or other figure provided should be used to determine which securities to buy or sell. Consult your advisor about what is best for you.

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