Wednesday, Oct 11, 2023

more Fed messaging, Grayscale

"The electric light did not come from the continuous improvement of candles." – Oren Harari ||

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Programming note: it’s a public holiday tomorrow where I live - Hispanic Day, when we get to celebrate being Spanish. There’s a surprisingly moving military parade with some spectacular fighter planes whooshing overhead, which I love but my dog hates. Anyway, this newsletter will be skipping a day, but back on Friday!

IN THIS NEWSLETTER:

• Why so much Fed messaging?

• Grayscale did the industry a service

• The banks are hurting

WHAT I’M WATCHING:

Why so much Fed messaging?

The shift in tone is getting louder.

On Monday, Dallas Fed president Lorie Logan and Fed Vice Chair Philip Jefferson both suggested that the climb in long-term treasury yields relieved some pressure on the Fed to tighten more. Yesterday, we heard from Minneapolis Fed President Neel Kashkari who pretty much said the same thing. So did San Francisco Fed President Mary Daly. Atlanta Fed President Raphael Bostic went even further and said the quiet part out loud:

"I actually don't think we need to increase rates anymore."

In reaction, treasury yields continued their retraction, with the 10-year more than unwinding all of October’s increase after its steepest one-day drop since August.

(chart via TradingView)

Why it matters:

I don’t think this is a coincidence. It’s not that Fed officials don’t speak their mind - of course they do, their academic reputations are on the line. But they do talk to each other, and that influences opinions to a certain extent, especially in a field as vague and “feely” as forward-looking monetary policy. And it could be that the Chair himself has said internally something along the lines of “things are getting dicey, we need to be very careful”. Chair Powell did sound a bit less confident that rates were heading higher in his last press conference. Today we get the minutes from that FOMC meeting, which might shed light on the conviction of committee members.

Here's an interesting twist: yesterday I wrote about how the uptick in global tension after this weekend’s attacks make another hike much less likely. But the comments we have heard over the past few days from Fed officials, hinting that the central bank was going to take a meaningful pause here, were almost certainly written earlier. In other words, this shift in tone has nothing to do with global tension. It’s all about high bond yields and their possible impact.