Discussion
In the span of 72 hours the Fed went from selling a put on Wednesday via Waller floating rate cuts in 3-5 months, to selling a call this morning via Timiraos. The “Fed Strangle”, as it were.
The Timiraos column is laced with signaling that the Fed will not repeat “stop & go” by prematurely cutting interest rates. The money quote:
Fed officials also don’t want to encourage market rallies that could stimulate economic activity by declaring an end to rate hikes. They particularly want to avoid prompting investors to expect even more aggressive cuts than officials are willing to entertain when the economy is still growing comfortably.
I have detailed the “anti-Burns” reaction function ad nauseam via these pages and on Xwitter, and in what will be the last public Xwitter post until 3/31/2024 public performance reporting, last night I summarized the body of FED communication since June 22, 2022 signaling the Fed will not repeat the “stop & go” policy error of the Burns Fed in the Great Inflation period of the 1960s and 1970s. The Timiraos article this morning is the perfect capstone to that thread.
As Cem Karsan so brilliantly outlined in the interview below, the EOY flows are going to overwhelm negative macro flows and hawkish FED rhetoric. What this morning’s call selling action does with SPX sitting below 4600 is guarantee the Fed will go max hawk circa SPX 4700-4900 in January.