Ecoinometrics - No pivots and no surprises

The Fed Chairman said nothing new and the stock market was shocked...

This market is mostly driven by expectations of what the Federal Reserve will do. If you had any doubts then what happened last week should have put them to rest.

But apparently a lot of investors have missed something. The Federal Reserve is all about telegraphing its next move. It has done so for years at this point. 

So if you don't hear about a pivot from the mouth of Jerome Powell months in advance don't expect to get one any time soon.

And right now there is no reason for the Fed change course.

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No pivots and no surprises

Alright, if you have been following along this newsletter for a while you are probably not among those investors who were surprised by Jerome Powell's speech at Jackson Hole last week.

But what has he been saying that's sending risk assets tumbling and short end of the yield curve soaring?

I’m paraphrasing but it went something like that:

The Federal Reserve has for main objective to bring inflation down to 2%.

They will not change course until that's achieved regardless of the state of the stock market and the economy.

Damn that's a groundbreaking statement! 

Oh wait a minute... no it isn't, it is exactly the same thing they have been repeating for months... We have talked about this topic plenty of times.

Now we might end up continuing to talk about that for a while simply because that 2% target is very far away from us.

Let's say that you are optimistic. You think that from now on every month will see inflation move lower. How long do you think it will take to get headline inflation at 2%?

We can estimate that with two scenarios: