The Macro Trading Floor The Most Hawkish Fed In Years - What Now?
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Dec 20, 2024 The recent hawkish stance of the Federal Reserve could reshape market dynamics as inflation remains a key concern. Discussions highlight how investors might need to rethink strategies in light of diminished safety nets, including the absence of the 'Fed Put.' The bond market’s unusual yield curve behavior sparks insights into both domestic and global economic implications, particularly for currency markets. Furthermore, recognizing extreme market signals and navigating unpredictable conditions become pivotal for successful trading strategies.
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Hawkish Powell and Market Reaction
- Powell delivered a hawkish message, emphasizing sticky inflation and fewer-than-expected rate cuts in 2025.
- Markets reacted with sell-offs, as the "Fed put" appears gone, leaving investors to buy their own.
Bond Market's Peculiar Reaction
- The bond market reacts to 4.25% base rates, not as accommodative, but the bond market behaves as if they are.
- The yield curve steepens, indicating that even small cuts at 4% could stimulate growth and inflation or signal fiscal risks.
Unusual Yield Curve Behavior
- Yield curve disinversion typically occurs with falling yields during recessions, but currently, yields are rising.
- This unusual rise, combined with fiscal concerns, may signal potential liquidity issues similar to the 2019 repo crisis.
