Author: Alf

Source: twitter

This is a very interesting Fed meeting.

As always, details make or break.Let's take a look at some of the most interesting details and market implications.

"Trust me, our tightening will be enough to bring inflation down to 2%. That's enough." This is Jerome Powell (Jerome Powell) said at the end of the press conference, this powerful message is reflected in the updated bitmap.

Some interesting points can be found from the figure.Twelve of the 19 members of the Federal Open Market Committee (FOMC) expect the federal funds rate to be between 4.50 and 5.00% by December 2023.

The bitmap has poor predictive power, but its signal effect here is clear - we're poised to remain very tight for a long time.

Will the market (blue) accept such aggressive bitmaps (orange)?It seems unlikely.

The overnight index swap (OIS) market is pricing in a similar terminal rate of 4.6%, but it's really hard to believe the Fed can keep rates at 4 for two years%above.

Powell frequently referred to the situation in the late 1970s: prematurely loosening monetary policy while fighting inflation could have adverse consequences.

The core PCE price index will hardly plummet, let alone pause tightening.

Inflation in the "necessities" mentioned by Powell is also relevant, and if it persists, low-income earners will take advantage of the undersupplied labor market to demand furtherincrease salary.

Low-income earners are an important group when it comes to consumer spending.

All in all, this is a reiteration of what was said at Jackson Hole: The Fed will keep going until the job is done, they understand that to bring down inflation, the pain isnecessary.

However, if the CPI cannot be lowered, it will cost more in the future.

Before discussing the market impact, I find it interesting that Powell is not considering selling the mortgage-backed securities (MBS) on the Fed's balance sheet at all.

This could lead to a low-probability, high-impact event: it would "help" the Fed to further weaken the housing market, but it could also cause surprises in the market.

Speaking of markets, let's start with bonds.

Real yields are largely unchanged, but Powell will be happy to note that the entire real yield curve (orange) is well above 0% today -The crunch will last longer.

This was not the case 3 months ago (yellow).

Higher real yields are not necessarily a headwind for risk assets.

But if real growth is also slowing, they converge into a single line - which is exactly what is happening now.

The more the Fed tightens policy, the greater the long-term damage to future economic growth.

Succinctly speaking, the slope of the yield curve has flattened sharply again.

The U.S. 2s10s OIS curve is trading at minus 90 basis points, and the further the Fed goes, the more it inverts.

We are at a very interesting juncture where additional front-end tightening may now lead to lower long-end yields for long-term bonds (?!),As we have seen today.

The damage to long-term nominal growth may be a more relevant driver for 30-year bonds than front-end interest rate levels.

In terms of risk assets, the situation is fairly simple: if they rise, financial conditions ease, and the Fed doesn't like that.

Also, simply plot the 5y5y real interest rate (orange) against the S&P 500 (blue), do you see that gap?

The long-term risk-reward ratio of risky assets does not appear to be very good, even without lowering returns or assuming a larger risk premium.

I think the base case is for the S&P 500 to retest the 2022 lows.

So what about precious metals?

Alternative and non-interest-bearing forms of currency tend to be downgraded when hoarded form of dollar cash pays nominally above 4% and possibly a positive real interest rate:Bad for gold.