Morning Report: No changes at the Fed

Vital Statistics:


  Last Change
S&P futures 3771 23.3
Oil (WTI) 53.32 0.44
10 year government bond yield   1.04%
30 year fixed rate mortgage   2.83%

Stocks are higher this morning on no real news. Bonds and MBS are down.


The Fed made no changes to monetary policy in its January meeting. The Fed will continue to increase the size of its balance sheet until “substantial further progress” has been made towards the Fed’s price and employment goals. They included the language that inflation must exceed 2% and be on track to exceed that number for some time. This is a signal to the markets that the Fed is not going to pre-emptively raise rates once we start getting inflationary signals.

The other thing to keep in mind is that the Fed has apparently learned from the 2013 “taper tantrum” and will not move as fast as they did back then. I suspect the Fed will gradually reduce the amount of MBS and Treasuries they buy, from, say $80 billion a month to $60 billion, and work their way down. Then they will re-invest maturing principal back into the MBS market. The punch line is that the economy has suffered a tremendous shock, and the Fed is going to go slow. This means rates are goin nowhere for a while. I think fears of a big increase in rates in the back half of 2021 are probably overblown. While there is definitely some inflation out there (food and housing) the Fed is going to ignore it until the unemployment rate is around 4%.


Fourth quarter GDP came in at 4%, a touch below expectations. Personal Consumption Expenditures rose 2.5%, again below expectations. You can see just how dramatically COVID-19 hit the economy by comparing the size of the Q2 and Q3 spikes compared to historical growth rates. For the fully year 2020, GDP decreased 3.5%.


Initial Jobless Claims fell to 847k last week. We were sitting around 200k per week pre-COVID, so we still have a lot of wood to chop to get back to normalcy.


New Home Sales rose to a seasonally adjusted annual rate of 842,000 in December, according to Census. This is up 1.6% from November, and 15% above December 2019 numbers. The median sales price rose 8% to $356K.

40 Responses

  1. While there is definitely some inflation out there (food and housing) the Fed is going to ignore it until the unemployment rate is around 4%.

    Perhaps 5.5% unemployment as a full employment “goal” makes more sense historically. Which might justify holding tight a little longer, say to 5.2%. But setting 4% unemployment as the goal before anti-inflation pressures the rate is setting the best case employment figures as the primary function of the Fed. I remain of the opinion that it should be the second priority whenever employment is at or near historic full employment norms, not boom norms.

    That made sense to me as I wrote it but it doesn’t read as I intended and I will think about it some more. Still, Brent, I invite your thoughts.


    • Mark, I think we use unemployment as a proxy for wage growth, and that is what we should be looking at. I think the government wasn’t really collecting wage data in the 1970s when the dual mandate was drafted, so they used unemployment instead. At least when i look at historical wage growth statistics on the Fred database, they don’t go back to the 1970s. So I think that is how we got here

      But more recently, even when unemployment was below 4%, we were seeing about 3% wage growth, and sub-2% inflation growth. There has been a lot of talk that the Phillips curve is no longer valid, and it probably was too simplistic to begin with.

      I think when the Fed looks at the balance of risks to the economy, they see deflation as a more painful outcome for most people than inflation. We are an indebted nation, and people in general carry a lot of debt. Inflation is a debtor’s best friend. CPI inflation was running about 3% for most of the mid 90s, and that was a pretty comfortable period. Even the 80s were 5% or so and no one was complaining.

      The Fed is more worried about the US turning into Japan than it is of re-creating 1970s style inflation.

      That said, I do see a lot of inflation at the supermarket. Sizes seem to be shrinking, and prices are rising. Not sure if this is COVID – related supply chain issues or something more permanent.


      • Thanks for a really clear reply that helps me focus a great deal.


        • Thanks, here is the weird thing – we DO have inflation, however it is not in goods and services, it is in assets.

          Not too much money chasing too few goods, but too much money chasing too few investments.

          Heck, you have people lining out the door to pay the German Government 50 basis points for the honor of lending to them. Talk about a bubble. It is like investing in a stock where you pay the company a dividend.

          I have no idea how this ends up, but we live in strange times.


        • Strange, indeed. If demand for German “debt” instruments increases any more the price will rise above face and the investors’ actual losses will increase, but they will have secure assets, by God.


  2. AOC tweets about GameStop.

    Ted Cruz tweets “I agree”.

    AOC responds: “ Happy to work w/ almost any other GOP that aren’t trying to get me killed.
    In the meantime if you want to help, you can resign.”


    • I don’t think unity is in the cards…


    • No. No unity in the cards. There are progressives on Twitter urging the left not to “side with the fascists” on the GameStop issue.

      The partisanship has truly reached ultra-lunatic levels. There used to be a time when you’d get coalitions of people who disagreed strongly on all sorts of issues, but united over a particular issue or set of issues because . . . that’s how you accomplish something.

      But now you can’t have unity because (a) you suffer from the delusion that the opposing side is all murderers and demons and/or (b) there is no problem so great that it means you should have to team up with evil, or (c) there is, in fact, no more important issue than the existential battle with the evil “other side”. Had a (d) as well but I’ve forgotten it. I’m sure it will come to me. 🙂


    • i’m obsessed with this story.
      mostly the fact that since wednesday there’s been little actual financial discussion on wallstreetbets and just a bunch of people calling themselves retarded apes with rocket emojis.

      but, it did remind me of this:


      • Wonder who Fauxahontas blames?


        • I’m sure it will turn out to be Wells Fargo’s fault…


        • I have not been following this closely, but from what I remember about these sorts of things when I traded, I suspect the hedge funds were blown out by their prime brokers early on. The first thing that happens is the borrow on the stock disappears and the prime broker will give the hedge fund a day or two max to deliver the shares. Once the stock ramps, the hedge fund will be subject to daily mark-to-market cash calls, which they probably can’t meet. If you are short 10MM and the bank requires 50% equity in the trade, you need to put up 5MM in cash. If the stock doubles, and you are now short 20MM, you need to come up with another 10MM.

          Their prime broker is on the hook for the losses if the hedge fund can’t pay, so they are just going to exit the position. (heck Dodd-Frank’s ban on prop trading forces this). I suspect the hedge funds and the banks are long gone, and the only thing keeping this stock up is a game of greater fool…


        • I just talked to a buddy of mine in the business. The borrow is still available, but it will cost you 26%. Prime brokers are demanding 100% margin on the long side and 300% on the short. No naked options positions. Most brokers are accepting closing transactions only and many are refusing to trade in the name altogether.

          The pros are long gone.


  3. Babylon Bee is hilarious.

    The Nobel Committee has announced they have nominated Black Lives Matter for the brand new Nobel “Mostly Peaceful” Prize for its hard work bringing attention to racism by burning down cities around the world.

    “No one has done more to contribute to the cause of ‘mostly peace’ than Black Lives Matter,” said Norwegian MP Petter Eide. “They brought attention to racism, and they did it while mostly not being criminal terrorists!” MP Eide then demanded the interviewer raise his fist while shouting “Black Lives Matter” before knocking him over with a brick.


  4. 10 days in and Biden has already issued 40 Executive Orders. But at least we no longer have an authoritarian in the Oval Office.



    • I stopped reading after this:

      What you need to know about this unfolding morality play is that it is the inevitable outcome of decades of lax regulation, cheap money and misguided notions about the efficiency of financial markets. The result is an oversize and overcompensated financial market that has long since abandoned its role to channel savings to the highest and best use, becoming nothing more than a high-tech casino.

      This is the outcome of driving transaction costs down to zero. Old-school market-makers and the NYSE specialist are long gone, and there is no adult supervision any more.

      Oh, and “overcompensated.” 1999 called and wants its talking point back. Those “overcompensated” trading jobs disappeared 20 years ago…

      Pearlstein is struggling to find a villain in this and there isn’t one. So he trots out the old saw about regulation.


    • Ultimately, this is end of bull market behavior.

      I remember stock split beeper ads in Barron’s back in the day.

      And monitoring the day trading chats to hear if they were talking about a name we cared about..


    • I remember that story about the kid from 1999. too bad he settled. should have taken them to court.


  5. Biden empowers the regulatory bureaucracy even further by doing away with any meaningful cost/benefit requirements for new regulations.

    Can someone please remind me again what exactly we were saving ourselves from by electing this guy?


    • Obama Wars. The Empire Strikes Back


    • Mean tweets as far as I’ve been able to determine.


    • Well clearly there is a class of neocon/corporate conservative that thought Trump was bad for business and anybody would be better (more open to new military interventions, friendlier to China, won’t talk about some mythical “deep state”, get along better with the corporate press.

      But also a lot people really did seem to fantasize they despite all the good things that occurred under Trump he represented an existential threat to the country and humanity.

      So that’s what they go. Not just no more mean tweets but no more being embarrassed at this guy being president, too.

      On the upside I’m figuring a 2022 sweep of the house is practically a given.


  6. Interesting story:

    A self-styled far-right propagandist was arrested in Florida on Wednesday on charges he used social media to try to suppress votes for Democratic nominee Hillary Clinton in the 2016 presidential election, federal prosecutors said Wednesday….

    …The complaint accused Mackey of working with four unnamed co-conspirators to spread disinformation claiming that people could vote for Clinton by posting a specific hashtag on Twitter or Facebook, or by texting Clinton’s name to a fake text code. One tweet he sent showed a photo of a Black woman with a campaign Clinton sign, encouraging people to “avoid the line” and “vote from home,” it said.

    Oddly, some one from the left did pretty much the exact same thing, putting on a MAGA hat and telling Trump supporters to get out there and vote on the day after the actual election.

    So far, no indication that she has been investigated or will be indicted. Which is really strange, since I thought it was the Trump administration that had politicized the Justice Department. So weird.


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