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Rate Hikes. Rainbows and Unicorns - December 18, 2018

“Damned if they do, damned if they don’t”

This week marks the last meeting of the year for the FOMC and as equity markets careen around their lows of the year, all eyes and ears are on the Fed. As we highlighted in mid-November, a number of market commentators have come out hoping the Fed takes a pause. Since then, stocks have continued to struggle and some economic data has disappointed, including Empire Fed Manufacturing Data, which registered a headline reading of 10.9 vs expectations of 20.0. This week, some interesting names can be added to the rate-hike detractors.

Stanley Druckenmiller went on a full blitz, taking to the airwaves in an interview with Bloomberg and penning an editorial in the Wall Street Journal along with coauthor Kevin Warsh. Druckenmiller warns in the editorial, “No ocean is large enough to insulate the U.S. economy from slowdowns abroad” and “U.S. financial-market indicators also signal caution”. In addition, “Credit markets are softening, and the decline in major commodity prices is foreboding”. Given that QE provided large benefits to the real economy, “won’t its reversal in the form of QT come with a cost? It can’t all be rainbows and unicorns”, Druckenmiller wonders.

The op-ed concludes,

“Given recent economic and market developments, the Fed should cease—for now—its double-barreled blitz of higher interest rates and tighter liquidity”.

Those with some time before (or after) the Fed presser are highly recommended to watch the Bloomberg interview in full as he explains his thinking with more nuance.

Adding to the conversation on the dynamics of QT and rate hikes this week was Jeffrey Gundlach. In an interview with CNBC (1 2 3 4) he explains that QT has been equivalent to additional rate hikes and believes the Fed shouldn’t raise rates this week. He said, “The bond market is basically saying ‘You know Fed, you’ve got no way you should be raising interest rates’”.  When pressed on what the Fed is doing wrong admits that, “The problem is the Fed shouldn’t have kept them so low for so long”. In regards to hiking at this meeting, Gundlach concludes “Damned if they do, damned if they don’t”.

The Fed still has some data supportive of a rate hike, including strong recent Core CPI data, and good Initial Jobless Claims numbers despite the equity swoons and vocal commentary to the contrary. As Tim Duy of Fed Watch said, “The Federal Reserve faces a most uncomfortable confluence of events... In a nutshell, equities continued to struggle in the midst of fairly solid data”. With bonds currently pricing in a 65% chance of a hike tomorrow, the market is still undecided. Action’s to you Jerome!