As expected the FOMC meeting didn’t bring any pivot and didn’t bring any surprises. We got a 25bps rate hike, a hint that they are pretty much where they need to be and a whole lot of talks about the banking crisis.
But the most important thing is that everything is falling in place to achieve what the Federal Reserve wants to achieve: tight financial conditions that will kill inflation.
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Tightening conditions
Inflation
Let me repeat that again because I've seen this story missing from a lot of the commentaries pre and post FOMC meeting: inflation.
That's it.
Inflation the only thing the Federal Reserve cares about. But of course Jay Powell doesn't wish for a complete collapse of the banking system. And that's why they are backstopping the banks with this new BTFP program.
So far a few $100bn have been used by the BTFP and that's already enough to reverse most of the balance sheet tightening the Fed did over last year.
If I understand correctly the setup of the BTFP, this facility could theoretically grow as large as the entire non-FDIC US bank deposits. The total US bank deposits base is about $19tn. I don't know how much is FDIC insured out of that. But even if say 70% is under FDIC that still means we the BTFP could be as big as the COVID QE...
But you have to remember, they are only doing that so they can keep rates high and deal with inflation.
You don't believe me?
Then just listen to Jerome Powell's post FOMC press conference. Actually you don't need to listen to it. We have some breakdown of the terms used in the press conference related to the vocabulary of:
Inflation.
Unemployment, jobs, labor.
Risk.
Recession.
Banks, banking.
Even in a press conference where journalists mostly wanted to talk about the banking crisis Jerome Powell still managed to keep inflation as the number one topic.
Meanwhile the vocabulary of risk, recession and the job market keep about the same share they had last month. Said differently, apart from addressing the banking crisis there was no major shift of concern for Jay Powell.
We will see what comes out of the FOMC minutes, but I'd wager inflation also continues to be the major subject of the debates.
Financial conditions
That being said it must be pretty clear by now that we have reached the second order effects of QT:
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