00:00There is a sense right now in markets that this is a Fed that is newly renewed really newly renewing
00:06their commitment to controlling inflation.
00:08Clearly yield curve flattening clearly risk off in stocks. Is this signal or is this noise.
00:16Well there's there's a lot of both. This is quite the change. And I think we're all trying to digest
00:23what we just what we just heard.
00:25I think there's a real risk here. Jonathan's not on the program so I'm going to do my best interpretation.
00:31The first reaction is not always the right reaction. And I think there's a risk here of overplaying the yield
00:40curve flattening and the questioning of the long end that I'm listening to here.
00:44So first of all you know this is a market that is sort of split between the old reaction function
00:50which really moved on the dot plot right.
00:53The nine votes the nine dots voting for for a hike were well in excess of expectations.
01:00And that's what moved the market. But but then you have Warsh basically telling you we're going to get rid
01:07of the dot plot.
01:08I mean he got you all the way almost to the goal line but didn't want to prejudge the outcome
01:15of the of the task force.
01:17But it's very clear you know the task force has its its job ahead of it.
01:22So that undermines a little bit of that interpretation. I think the second reaction from the market is just a
01:29very clear hawkish statement.
01:31But I think here you you there's a possibility here that the market may want to rethink or all I'm
01:39rethinking not I'm talking about the market.
01:42But you know is this hawkish for rates or is this hawkish for the balance sheet because if you look
01:47underneath what he said there were some very kind of telling interchanges there.
01:53And when you think about the path dependency of Warsh and his history during the post GFC you know first
01:59you know why was it that the communications of the Fed became paramount for markets that interchange about why markets
02:08stopped paying attention to the data.
02:09And instead of having their own reaction function they were reacting to what they thought the Fed's reaction function would
02:16be.
02:16And that's because the era of the post GFC was the era of we will do whatever it takes and
02:23believe me it will be enough.
02:24That was the quote from the ECB and Draghi when he threatened bond markets that the central bank's balance sheet
02:32was bigger than the market's balance sheet.
02:33And that ushered in or was reflective of an era where central banks were the dominant price makers and he
02:40wants to do away with that.
02:41Well what's the primary tool for doing away with that. It's the balance sheet.
02:45So one of those task forces may be more important than the others when it comes to markets and market
02:52reactions.
02:53Then the second interchange that was really quite revealing was when asked about restrictiveness it wasn't so much about the
03:01unevenness.
03:02But what he went on to say about what is the source of the unevenness I found that to be
03:07the most revealing comment because he said that might be due to transmission mechanisms that one might be about the
03:14interest rates that's reflective to housing and the other the easiness of financial conditions is about the balance sheet.
03:22Well that's about some of the risks of running an ample reserve system that maybe here is being hinted at
03:29at being changed.
03:30And if you were to change that what has been the biggest beneficiary of the big balance sheet the flattening
03:34of the term premium right.
03:36That was the whole point of a lot of the bond purchases was to bring down that term premium and
03:42we're still seeing the legacy of that benefit.
03:44So if the signal here is maybe we're going to be hawkish on the balance sheet I'm not sure your
03:50reaction is big curve flattening.
03:52I get the initial reaction hawkish surprise in terms of the the focus on on price stability.
04:00But there may be some other second order effects here. We'll think about that actually will become first order.
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