Fed Pushes Back on Thoughts of a Dovish Pivot


  • Yesterday, a pair of Fed officials firmly pushed back on the notion that Fed Chair Powell’s comments after last week’s 75bps rate hike represented something of a pivot to a more dovish Fed in upcoming meetings.


  • San Francisco Fed President Mary Daly and Chicago Fed President Charles Evans both reiterated that the Fed was still a long way from achieving the tightening in financial conditions deemed necessary to wrestle inflation back to its 2% target. That began the selling in Treasuries after opening the trading on Tuesday in the green.


  • That selling intensified as House Speaker Nancy Pelosi’s landing in Taiwan went without incident and the flight-to-safety trades started to be reversed. While worse case scenarios on the Taiwan visit weren’t realized yesterday, you can expect China to respond in varies ways to what they view as an unnecessary provocation.  They’ve already said they will conduct live-fire military exercises around the island once Pelosi leaves so the saber-rattling has already begun.


  • We don’t, however, expect China to respond by selling their vast horde of Treasuries. First, that would pressure the value of holdings they don’t sell, and second, they still expect to receive vast quantities of dollars in foreign trade with the US and what better store for those dollars than the most liquid market in the world?


  • Meanwhile, away from the geo-political front, St. Louis Fed President James Bullard was back in the news with comments that he expects the economy to avoid a recession, even as he expects the terminal fed funds rate will have to lift from a 3.50% market expectation to something closer to 4.00% to quell inflation forces. He also said he expects the Fed will have to keep rates higher for longer, which is at odds with the market’s expectation of rate cuts in 2023.   The market’s latest expectation for fed funds rates are shown in the graph below.


  • As for inflation, we’ve noted all manner of commodity prices declining significantly since many hit highs back in March. From gas, to wheat, to copper, to lumber all have seen significant declines so upcoming inflation reports should start to see better month-over-month comparisons. The problem is the year-over-year rates will prove to be sticky for a while as summer 2021 rates rolling off the calculations for the next several months are rather tame. That is, replacing a 0.2% or 0.3% monthly increase with the same won’t budge that YoY number. That should keep the Fed firmly in hiking mode for the balance of this year.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.14 3.14 3.13 3.18 3.30 3.76
0.50 3.12 3.11 3.07 3.07 3.16 3.65
1.00 3.12 3.08 3.04 3.02 3.07 3.52
2.00 3.07 2.98 2.94 2.95 NA
3.00 2.89 2.89 NA
4.00 2.84 NA
5.00 2.80 NA
10.00 NA

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Published: 08/03/22 Author: Thomas R. Fitzgerald