Reading the FOMC statement was actually as exciting as watching paint dry. The comments on the economy and inflation were pretty much similar to the July meeting. There was reference to the Hurricanes and the devastating impact but shouldn’t impact growth over the medium term.
On what we cared most about today, QT will start in October. As to what they will do in December, 12 of 16 Fed members want to hike rates in December. Markets of course were about 50/50. As to dot plots and forecasts in 2018 and on, throw them out as the Fed will look much different next year in terms of membership. Therefore we’ll get new opinions and forecasts.
There was no comment on easy financial conditions so we’ll see if Yellen touches upon that in the press conference.
Bottom line, I reiterate my view that just as QE created much ebullience in markets, QT will do the opposite. While it won’t be symmetrical because of the gradual start to QT, everyone has to remember that the 3rd mandate and purpose of QE was higher stock prices. Thus, I believe its delusional to think there won’t be a negative impact on asset prices as the reverse happens. As for the December rate hike, it is happening if the S&P 500 handles QT in a smooth way in coming months. Thus, we either rally ourselves into another rate hike or sell off away from one.
The 2yr note yield now sits at the highest level since November 2008, up 3.5 bps. The 2s/10s spread is down slightly as the 10 yr yield is up by 3 bps. The US dollar is rallying as to be expected with the Fed walking people up to the December hike.
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