{"id":157880,"date":"2022-09-19T12:30:00","date_gmt":"2022-09-19T16:30:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=157880"},"modified":"2023-02-10T13:30:35","modified_gmt":"2023-02-10T18:30:35","slug":"goldilocks-or-gorilla","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/fixed-income\/goldilocks-or-gorilla\/","title":{"rendered":"Goldilocks Or Gorilla?"},"content":{"rendered":"\n

There\u2019s a 500-pound gorilla<\/a> in the markets.  Oddly, it\u2019s the same person that I\u2019ve frequently<\/a> called<\/a> Goldilocks<\/a> over recent months. <\/p>\n\n\n\n

The world\u2019s central banks offered nearly constant monetary stimuli, which have been a key factor in the rising prices of risk assets over the past decade-plus.\u00a0 To a large extent, investors have become addicted to that liquidity.\u00a0 Now, with the Fed and many of its counterparts actively raising rates and reducing the size of their balance sheets, we now must contend with whether the Fed will withdraw liquidity without disrupting the monetary foundation upon which risk asset prices are based.<\/p>\n\n\n\n

Equity investors loved Federal Reserve Chair Powell\u2019s comments after the last FOMC meeting. The table at the bottom of this piece shows that the S&P 500 rose over 5% in the rest of the week after the meeting.\u00a0 In response to a question, he mentioned that the now-current 2.25-2.5% Fed Funds target was in the range of neutral<\/a>.\u00a0 That was broadly taken as a sign that the Fed might pivot to lower rates more quickly than expected.\u00a0 We noted at the time<\/a> that traders focused on the part of his answer that rates would be heading into restrictive territory, and asserted that the pushback from other Fed talking heads would swiftly push back on the neutral comment.\u00a0 That proved to be the case<\/a>, but investors continued to focus on the potential for a rosy Fed course of action rather than a more realistic one.\u00a0<\/p>\n\n\n\n

At Jackson Hole, Mr. Powell went from Goldilocks to gorilla.  He stated tersely and forcefully<\/a> that the Fed\u2019s goal was to bring inflation back to back to its 2% target level, even if that came at the expense of the broader economy.  Equity markets hated hearing that, and were not thrilled when he broadly reiterated that message at a Cato Institute conference.<\/p>\n\n\n\n

Thus we have the key question for the week ahead.  Although Fed Funds futures are currently pricing in a 17% probability for a full 1% hike, the broad consensus is for a 75 basis point rise.  In and of itself, an as-expected hike should be a mild positive, since it would remove the fears of a larger one.  But the key will be Mr. Powell\u2019s comments at the press conference.  If he continues his recent strident tone, markets will be unimpressed, to say the least.  If he reverts to his tendency towards a conciliatory tone, then we might see another enthusiastic period for both low-risk and high-risk assets alike, many of which are oversold.  Gorilla or Goldilocks indeed.<\/p>\n\n\n\n