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- Credit Markets (Yes): A liquidity crisis would cause the Fed to pivot.
- If the credit markets seized up the Fed would intervene. Market intervention is after all the Fed’s operating model (as is the case for all central banks). Consumers and investors would have to lose confidence in the U.S. Economy to the point where quality companies find it difficult or impossible to issue debt. The Treasury would find paltry demand for new U.S. Treasury issues.
- Equity Markets (No): I do not see the Fed pivoting simply because the Equity markets are rolling over.
- Economy (It depends):
- A third consecutive weak GDP quarter won’t be enough to cause the Fed to pivot. Weak used car sales won’t be enough for the Fed to pivot. Apple pulling back production on soft demand won’t be sufficient to cause a Fed pivot.
- If there were to be a fiscal response sometime in 2023, we can’t imagine that Powell would stand up to the fiscal side and refuse to print money to subsidize whatever fiscal spending plan comes through to “stimulate” the economy.
- A soft economy combined with a CPI in the 3-4% would likely be enough for the Fed to lower rates. I believe it will take longer to get to a 3-4% CPI than the markets or the Fed believe. Also, unemployment will have to climb higher than the Fed believes to achieve its CPI target. Hopefully the Fed will not restart its awful interventionist QE program, the Fed intervenes enough as is. We would prefer for the Fed to get out of the rate setting business and instead trim its Balance Sheet in order to shrink the Money Supply which will cool inflation and naturally lift yields.
- A continued strong U.S. Dollar (No):
- It has been interesting to watch market commentators contemplate whether the Fed would pause or pivot so as to not cause the Dollar to appreciate further and cause additional pain for other countries. The Fed’s loyalty is to the U.S. Economy, not to the U.K., or Germany or Japan. A strong Dollar is generally good for the U.S. Economy and for American consumers, particularly those that purchase abroad. The U.S. is an import nation and imports are cheaper when the Dollar is strong relative to other currencies. When we say a “strong” Dollar we mean strong relative to other currencies. The Dollar certainly does not have the purchasing power it did years ago. Thank former President Nixon for taking the U.S. off of the Gold Standard in August 1971.