Common Cents & Unexpected News

This past Wednesday was full of newsworthy events. The President met with Vladimir Putin in Geneva, and the Federal Open Market Committee (FOMC) concluded its 2-day meeting on monetary policy. While Putin is officially the President of the Russian Federation, I hesitate to call him that. The reason being is I believe he should quit wasting everyone’s time, acknowledge the obvious, and crown himself Tsar.

As for the meetings themselves, no one really expected anything surprising or even terrible substantive. The tensions between the United States and Russia would not dissipate after one, relatively short, discussion. Further, the Federal Reserve has telegraphed monetary policy at least through the end of the year, if not longer. So, the only thing left to do was to overanalyze everything.

If you are keeping score at home, ‘we’ got what most people expected.

In my opinion, the so-called summit between Biden and Putin was something of a non-event. To be sure, folks studied body language, handshakes, and a number of different things to determine which leader was the alpha dog. Did Putin break eye contact too quickly? Why was Biden nodding his head? The Russians slouched in their chairs more than the Americans, what does that mean? Putin showed up on time, he never does that, and Biden came in after him. Does that mean Putin feels he is the weaker of the two? The list goes on and on.

From what I know about the meetings themselves, both countries are going to repost their ambassadors. Biden threatened Putin over cyberattacks, and the Russian denied his government had anything to do with them. The two sides disagreed on the Ukraine joining NATO, and the list goes on and on. During his press conference, Putin appeared to answer questions somewhat randomly, and deflected or obfuscated like a pro. Typical. For his part, President Biden started his presser by admitted he was going to take questions from predetermined reporters, which undoubtedly had his handlers gasping for breath. He handled these pretty effectively, but seemed to lose his cool and focus when unauthorized reporters shouted their own queries. Again, not really out of character.

In the end, I admit, I had wished for so much more. I wanted some fireworks, some obvious animosity, pointed questions, and heated arguments. However, the whole thing seems to have been very well orchestrated and, dare I say, benign. So much so, here we are on Friday, two days after this ‘historic’ meaning between two of the world’s most powerful people, and it has already fallen off the front pages…everywhere.

Then, just a couple of hours later, if even that, the Federal Open Market Committee (FOMC), commonly called the Fed in this instance, released a statement saying it wasn’t going to make any immediate changes to monetary policy. This was as expected. However, investors got spooked by the ‘dot plots’ of the individual members of the committee. These track where the members believe the overnight lending target will (or should be) at points in the future.

As I wrote in a letter that day: “… FOMC forecasts (called dot plots) now suggest the potential for two 25 basis point rate hikes in 2023. This was/is a little earlier than investors had been anticipating, which was no changes through the end of 2023. The glass is half-full analysis would be: the economy is performing better than the Fed expected. The glass is half-empty one is: the Fed is going to curtail credit sooner than expected.”

However, a pragmatic person, one who sees only enough water in the glass to quench their thirst, would notice the Fed doesn’t appear to be in a hurry to do much of anything. After all, the end of 2023 is still two years away. As we all know, a lot can change in two years. Consider this: two years ago, no one had heard of COVID-19, and on June 18, 2019, Donald Trump officially announced his campaign for reelection.

Still, people love to overthink the Fed’s actions and intentions, and investors wrung their hands and gnashed their teeth! Oh no! The Fed might increase the overnight lending target rate between members banks to a level still well BELOW the official inflation gauges in 20-24 months! Put another way: short-term money is going to be essentially free for the next couple of years.

Further, an increase in the overnight rate SHOULD dampen inflation expectations, which would bring DOWN longer-term borrowing rates. Although lenders don’t historically like flat yield curves, banks will be happy to fork over as much money as you want on a variable rate loan when the Fed is hiking rates. So, lower inflation and a still steady supply of liquidity, at least enough liquidity since short-term rates will still be less than inflation expectations? Hardly an economic death knell scenario.

While the dot plots threw a few folks off, more than a few I suppose, the meeting was pretty much as expected: no major changes to monetary policy; a reiteration recent increases in inflation are transitory, and an acknowledgement that vaccinations are helping people get back to work. No surprises here, at least I wasn’t surprised.

So, Wednesday? It could have been so much more than it was. Fortunately, it wasn’t.

With this said, this morning, Friday the 19th, St. Louis Fed President Jim Bullard apparently forgot his boss, Jay Powell, had already had a lengthy discussion about inflation and interest rates with reporters just a couple of days ago. He also seemed to forget it is customary to ‘toe the party line’ when talking to reporters and making prepared public remarks, especially so soon after an FOMC meeting.

However, Bullard told CNBC he anticipates a rate hike as early as 2022! This is even earlier than the dot plots suggested on Wednesday! Oh boy. While Bullard isn’t a voting member of the FOMC this year, he IS next year….and that startled investors! So much so, stocks have taken it on the chin today in anticipation of more expensive money sooner than expected, much sooner than investors had been thinking prior to this week.

It is interesting, isn’t it? How two major events, the summit and the FOMC meeting, produced such forgettable results, while a slip of the lip from a person most people have never heard of previously is arguably the biggest news item of the week.

Take care, have a great weekend, and be sure to listen to our Trading Perspectives podcast.

John Norris

Chief Economist



As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.