The Fed is trying to stop markets panicking over Hamas/Israel conflict
After one day away from my desk, I come back to a very different world. And I don’t mean in the context of Israel and its war against Hamas. Yesterday, US bond yields fell off a cliff, or at least in the context of the huge Treasury market they did with both the 2 year and the 30 year notes back below 5%. The benchmark 10 year note, having gone out on Friday at 4.86%, is trading at the time of writing at 4.64%. A 22 bp reversal is not small beer.
This great bounce back in bonds has to a large extent been driven by a phalanx of federal rate setters appearing on stages and TV screens across the States declaring with an extraordinary matter of factness that the Fed reckons it has done enough and that further monetary tightening is most likely and for the moment not necessary. And where does this all of a sudden come from? Is the Fed becoming fearful of the sharp rise in bond yields across the curve and are we seeing the central bank panicking? Is it changing its fairly inaccurate message of “higher for longer” into a more stable “high for longer”? Readers may recall my recent question what, when using the comparative adverbs of higher and longer, the two were to be compared to?
Raphael Bostic, president of the Atlanta Fed, led the charge at the annual convention of the American Bankers’ Association with the extremely outspoken observations that “I think that our policy rate is at a sufficiently restrictive position to get inflation down to 2%,” followed by “I actually don’t think we need to increase rates anymore.” I was particularly interested to hear Mary Daly of the San Francisco Fed opine that rising bond yields of themselves will have had a cooling effect on the economy and that the market is to a large extent now doing the Fed’s job for it. There you have it.
I suspect, however, that there might be a little bit more to the story. Markets had taken fright at the prospect of the Hamas attacks but, whereas the Russian invasion of Ukraine was to have a significant impact of the global food chain and supply and distribution of Russian gas across Europe, the wider economic impact of Israelis and Hamas fighters slugging it out in the streets of Gaza is, to be frank, pretty negligible. This is not 1973 when OPEC cut production and, along with an embargo on sales of the black stuff to America, caused the price to rise from US$ 3/pbb to US$ 30/pbb. In order to compare with current prices, multiply by five. The Fed is telling markets that there is nothing to fear, that it does not expect the Israel conflict to be a wider economic and imminently inflationary risk factor, and that there is no need to worry.
As at this morning, Hamas’s call for pan-Arab solidarity has fallen pretty much on deaf ears. Oil producers including the UAE and Saudi Arabia have very different economies than they did 50 years ago and closing down the global economy for the sake of a bunch of local terrorists, especially ones backed by Iran, simply makes no sense. The buttons which play the pre-recorded platitudes with respect to the rights of the Palestinian people to self-determination and so on have all been pressed but beyond that, for now at least, not a lot more. A week ago, WTI had been trading down at US$ 82.30. After Saturday’s murderous incursion it spiked up to US$ 86.00 and change but that was about it. As even the political journalists have noticed, it remains a long way from the September 27th high of just under US$ 94.00. I just sense that the Fed’s rhetoric is to some extent driven by its own panicking that markets might panic. The collective message yesterday was that the Fed is not asleep and that all is under control.
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