As the Fed has seemingly transitioned from being focused on returning PCE to target, to FCI's, the board is ignoring negative credit developments for the sake of a liquidity wave they are struggling to understand. One thing I have noticed this year is, both the Fed and the street seem to have bundled "credit" and "liquidity." The reason I want to deal with this topic is I think it is fundamentally rooted in my dollar thesis from last post. The emergence of dollar liquidity has clearly confused signaling metrics across markets. The Fed is thinking they are behind the curve in FCI's and with U3 so low, they feel they have the rope to play some catchup. The fear now is, as they usually do, the Fed will overstep as they incorrectly read these liquidity drivers and move to remove accommodation despite slowing PCE. What makes this worse is, if my dollar thesis is correct, by instituting their proposed SOMA adjustment policy from the June addendum, the Fed will be doubling down on what will be receding liquidity as the Treasury rebuilds their cash balance through increased Tbill issuance. In my view, this brings us back to a world that is structurally dollar challenged. So, the topic of this post is, why liquidity and credit are sending different messages, and by bundling them the Fed and the street are missing significant nuance and context in their respective outlooks.
July 6
July 6
July 6
As the Fed has seemingly transitioned from being focused on returning PCE to target, to FCI's, the board is ignoring negative credit developments for the sake of a liquidity wave they are struggling to understand. One thing I have noticed this year is, both the Fed and the street seem to have bundled "credit" and "liquidity." The reason I want to deal with this topic is I think it is fundamentally rooted in my dollar thesis from last post. The emergence of dollar liquidity has clearly confused signaling metrics across markets. The Fed is thinking they are behind the curve in FCI's and with U3 so low, they feel they have the rope to play some catchup. The fear now is, as they usually do, the Fed will overstep as they incorrectly read these liquidity drivers and move to remove accommodation despite slowing PCE. What makes this worse is, if my dollar thesis is correct, by instituting their proposed SOMA adjustment policy from the June addendum, the Fed will be doubling down on what will be receding liquidity as the Treasury rebuilds their cash balance through increased Tbill issuance. In my view, this brings us back to a world that is structurally dollar challenged. So, the topic of this post is, why liquidity and credit are sending different messages, and by bundling them the Fed and the street are missing significant nuance and context in their respective outlooks.