For years now, the actual rate change announced at every FOMC meeting did not matter. By the time the meeting occurred, the move was priced into the SOFR curve weeks in advance. The only exception to this was in September 2024 when Powell surprised the rates market and cut 50bps. This was one of the only times where we went into a meeting with 50/50 odds priced into the market (either 25bps or 50bps). This meant that the market reaction was largely driven by the change in pricing once it was announced, not the future reaction function.
Before the ZIRP era, this was the common way to do things. However, under Yellen and Powell, and pioneered by Bernanke, the Fed mandate was to never surprise the rates market and ensure their move gets priced into markets well-ahead of time.
This is why for so many years casual Fed observers would be confused on days when for example we would cut rates and markets would sell off, or we held rates steady and rallied. The market reaction function was entirely dependent on forward guidance and forward expectations, not the announced change that day.
We are now going to enter a regime where what the Fed actually decides to do each meeting will be the marginal market driver again and that is by design.
In practice, I expect the next few meetings to be priced at 50/50 odds moving forward and that's by design. It is now up to rates speculators to analyze the economic data and come to their own analysis on where rates should be, the Fed will not be spelling it out for us any longer.
Overall, I think this is a good thing. Forward guidance was a tool from the ZIRP era pioneered by Bernanke as a way to ease monetary policy without going into negative rates. We are no longer in a ZIRP world and it was time to change this.
On net, expect higher rate volatility, more sensitivity to changes in SOFR in the economy, less smoothening of business cycles, and a return to a more pure Taylor rule-like reaction function.
This is a big shift and in my opinion a welcome one, despite my podcast being named Forward Guidance!
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BLACKROCK’S BITCOIN INCOME ETF $BITA BEGINS TRADING TOMORROW
The iShares Bitcoin Premium Income ETF ($BITA) is set to launch Tuesday, according to Nasdaq.
The fund aims to generate a 15-25% annual yield by selling covered calls while still capturing at least 70% of Bitcoin’s upside.
My bullish/bearish take on bitcoin is that we shouldn’t blame any entity for buying too much of it, because if bitcoin can be killed by an entity buying it, then it wasn’t meant to be.
If all it takes to kill bitcoin is a bullish entity that likes it enough to buy, then go home.
La confiance en elle d'Aryna Sabalenka ! 💃
Il n'y a pas beaucoup de joueuses auxquelles tu peux demander de danser devant 15000 personnes et qui accepteraient.
“If I were rich, I would have a plaque made up, and sent to every judge in America, bearing a statement made by Adam Smith more than two and a half centuries ago: ‘Mercy to the guilty is cruelty to the innocent.’”
— Thomas Sowell