Chart Of The Week - The Fed is Cooked
This week: Fed problems, global monetary policy pulse, inflation outlook, commodities, US dollar, sector/style rotation, market update...
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Chart of the Week - Fed Fighting Yesterday’s Battle
Fed Catch-Up From Behind the Curve: The chart below shows the implied path of the Fed funds rate based on a broad composite of inflation expectations and labor market indicators (over 20 individual data series — which serve to amplify the true signal vs noise).
We can clearly see how it was justified for the Fed to cut rates into the pandemic (perhaps even more than it did)… but that they should have removed the emergency measures shortly after reopening. Instead, they made an active decision to take the risk of overcooking growth/inflation/speculation vs the risk of tightening too early and potentially scuppering the nascent recovery.
A direct consequence of all this and everything else that’s gone on over the past year is the various leading indicators for the US economy have plunged to record lows (very high risk of recession now), so the Fed will probably need to pivot later this year as it continues to fight yesterday’s battle. But that will not be good news — contrary to popular narratives — because by the time it becomes obvious (and because of 1970’s inflation fears affecting decision making biases: it will need to be obvious) recession will already be underway.
Key point: As a result of overcooking it on stimulus, the Fed is now cooked.
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Topics covered in the latest Weekly Insights Report
Aside from the chart above, we looked at several other charts, and dug into some really important macro/asset allocation issues right now:
Fed: don’t wish for pivot when coming from behind the curve…
Global Policy Pulse: where to next for central banks (and global equities).
Inflation Outlook: the numerous forces set to drive global disinflation.
Commodities: why we are still bearish commodities as an asset class.
US Dollar: keep calm and bear on.
Rotation Ripples: Small vs Large, Value vs Growth, and sectors driving it all.
Market Update: checking in on bank CDS and bond yields.
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Callum Thomas
Head of Research and Founder at Topdown Charts
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