They Talk Alot

Macro Perspectives: Mon 30 Aug 2021

The Fed spends a lot of time manipulating the expectations of consumers and businesses - as part of their policy making - in an attempt to manufacture stability in markets, and the path they would like to see, for the economy and for interest rates.

Sometimes it works. Last year, at the peak of pandemic and economic uncertainty, they managed to stabilise the treasury market by vowing to backstop the troubled corporate bond market. Within months of the announcement, even crippled airline companies (chart below) were able to sell billions of dollars of bonds. All told, the Fed only had to buy $14 billion worth of corporate bonds - a tiny fraction of the total market. It was the threat that they would do "whatever it takes" that returned stability, not just to the corporate bond market, but to the treasury market and to all global markets (stocks, bonds, commodities...everything).

Now they are trying to navigate the end of emergency policies and they are, once again, talking a lot. As we know, the Fed chair had a highly anticipated prepared speech on Friday morning, where he was due to telegraph the beginning of the end of QE.

He did, but with a healthy dose of expectation manipulation. First, before Powell gave his speech, they rolled out Fed President after Fed President for interviews with financial media. Their job was to confirm the market expectation that the Fed sees the economy in good shape, inflation as possibly a higher risk than previously projected, and, indeed, that it was time to start winding down the QE program.

So what did the most important Fed official say, the Chair? He reigned it all back in. He gave us five reasons that inflation wasn't going to run hot.

With that, the interest rate market finished lower on the day - that was a victory for Powell and company. After all, they want to remove accommodation on their schedule. They don't want to see a run up in market interest rates, which would put them in a position where they would be forced to unwind emergency policies faster, and begin lift-off of the Fed Funds rate earlier.