Notes From Underground: Some Perspective on Wednesday’s FOMC Meeting

The FED has painted itself into the proverbial corner by pre-announcing a rate hike. The market will be listening to Chair Janet Yellen’s press conference, which takes place at 1:30 CDT, a half hour after the Fed releases its statement and summary of economic projections. The market is expecting some discussion Fed’s balance sheet unwind, but Yellen will be cautious as she won’t want to cause a large selloff in the Treasuries led by the algo-driven headline readers. Tomorrow morning the Bureau of Labor Statistics releases the CPI data, alongside the Census Bureau’s retail sales data. Market consensus is for tepid numbers on both releases.

The U.S. economic indicators have been very mixed as the jobs reports have continued to show a decline in the unemployment rate. Yet consumer consumption numbers have been soft, especially with autos showing a slowdown. Credit growth in the commercial and industrial sectors have been very weak. Most importantly, wage growth has been very moderate. Things I will be watching in response to a fed funds HIKE:

  • Gold has been up 2% since the May 3 meeting so if the Fed raises rates and GOLD holds support levels, I would look for renewed strength;
  • The U.S. dollar is also down almost 2% since the May FOMC meeting. If the FED raises rates and the dollar fails to rally I would look for further currency weakness;
  • Crude oil is virtually unchanged but the FED views energy prices as transitory so no big impact here;
  • The SPOOS are 2.5% higher since May 3 and I think that Yellen will speak to the strength of financial markets as an indicator that some of the global headwinds to growth have dissipated, which provides the rationale for the FED to raise rates;
  • Be patient and watch the 2/10 curve in the 24-hour period as an indicator of bond market sentiment about the FED beginning far too late into the growth cycle. This will be important if the 2/10 curve can close the week below the long-term support level of 73 BASIS POINTS.

On Thursday, the Bank of England and the Swiss National Bank will meet. Perspective is key and patience will be the way to play.

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16 Responses to “Notes From Underground: Some Perspective on Wednesday’s FOMC Meeting”

  1. ShockedToFindGambling Says:

    I think there’s a decent chance FED doesn’t hike. Economy and inflation have slowed and Friday’s tech break could be a warning sign. At any rate, we’re near the end of the tightening cycle. IMO, Gold will rally and yield curve will steepen tomorrow.

    • yra harris Says:

      Shocked–low probability ,high impact outcome

      • The Bigman Says:

        Last week a realtor friend called to to me that his client who had a jumbo loan on a new home purchase for 4% had gone to a major bank for another reason and when the bank heard he was in the market for a first mortgage offered one for 3.5% My friend thought this odd if the fed was raising interests this week
        Monday every REIT I own went up 1-3% in price that was odd in that I own a diverse group unusual to see all go the same direction especially if fed is raising rates in 2 days.

        Yesterday gold and silver flat to down but gdx and gdxj both close higher Not would I would expect if fed raising rates today.

        Today Gold and silver higher yeah probably due to economic news but again not necessarily what I would expect if fed raising rates in 2 hours.

        So in accord with shocked I will not be shocked if they do not raise rates As far as the gambling- the old poker adage applies If you don’t know who the mark is at the table, it’s you.

      • ShockedToFindGambling Says:

        Boy, was I wrong…….I don’t know what the FED looks at. Credit and inflation spreads are deteriorating. IMO, their tightening window was 2013-15, and they missed it.

  2. David Richards (@djwrichards) Says:

    Behind the curtain, do they look at the looming pension crisis?

    They need a steeper curve and higher rates to help the pensions and banks. Thus the Fed must damn the torpedoes, hike rates and cut the balance sheet.

    When the pension crisis breaks, which isn’t long away, all hell will break loose and fingers will rightly be pointed at the Fed for its policy error of keeping rates too low for far too long. The Fed is a likely candidate to bear the wrath & blame of politicians and many millions suffering pension failures, and in such a crisis the Fed’s survival in its current form is at risk. Surely the Fed sees this coming?

    Better politically for the Fed to inoculate itself against the fallout of the coming pension crisis by normalizing now and take this opportunity to let any economic fallout of normalization fall on the shoulders of the unpopular president, with so many currently keen to blame him for everything (not a political statement).

  3. yra harris Says:

    David—your points i agree with –but the curve won’t steepen as we have discussed for many moons.The FED will of course blame it on the European and BOJ central banks but this flattening has been relentless and is actually flatter then the german curve which was not so four months ago.Mr.Santelli and I were discussing the conundrum for global macro guys—If the Fed has broken the signalling mechanism of the debt markets maybe the 2/10 flattner has no significant meaning—-that is a real problem but we shall see because the Fed appears to have waited way too long which is what has been argued here for several years—the pension crisis has not even hit the first inning –the pitcher still in the bullpen warming up

  4. Trader 1 Says:


    Your “far to late in the growth cycle comment” — Look at the thouands new of rental units coming on the market in the next 6 months in Chicago (river north, near north, west loop areas). Its kinda hard to count them all.

    Question – Is this “real” rental demand or just a total misallocation of capital due to zero % interest rates?? And if its a total misallocation of capital, how many more sectors has this built up in??

    • Yra Says:

      Trader–the banks do have money to lend so as usual in the late cycle throwing it at construction and development.In a city raising real estate taxes 10% and a net outflow of people–I don’t know how they can be building all those units?It boggles my mind

  5. kevinwaspi Says:

    I agree, the corner the Fed has painted itself into is getting tighter, They will raise today, and every word of the Chair will be parsed for next clues. Interesting how Atlanta Fed’s GDP NOW has been significantly adjusted downward, currently at 3.0% through June 9 data releases.Given this morning’s retail sales, CPI, and Business Inventories, look for the revision to fall again. As I’ve stated before, very low unemployment rates coupled with Fed tightening precede economic downturns (recessions), quite frequently.

  6. Robert Zimmerman Says:


    If the Fed starts to reduce their balance sheets don’t you think rates will go up and stock prices will fall. The beginning of the unwind?

    • yra harris Says:

      Robert–yes that should be the short term effect as I wrote in Sunday’s blog—there is so much debt on the books of consumers and corporations and this will be problematic.So here we are watching the potential impact and more importantly the 2/10 yield curve will reflect the market sentiment about the fed’s actions

      • Robert Zimmerman Says:

        Thank you!

        Once Kuroda and Draghi stop buying and remember they own stock and corporates their will be a bloodbath. This is why Yellen had to start her buyback. I’m raising cash ASAP.

  7. kevinwaspi Says:

    My mistake: The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 3.2 percent on June 14, up from 3.0 percent on June 9.

  8. silverbug2155 Says:

    Yra, what do you see different in this rate rise environment vs Volkers when it comes to gold? We see so many headlines about how gold will suffer if the Fed supports the dollar by raising the rate. Is this not an admission of inflation?

    • Yra Says:

      Silver—if real yields go positive I will become bearish gold against the Dollar but I will sustain a bullish position against various currencies.If gold stays over all bid it is because of a coming fear of deflation not inflation

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