Fed Chair Powell’s Dovish stance
Fed Chair Powell’s Dovish stance was predictably on the cards in a backdrop of a slowing global economy, diminishing liquidity condition and a downgrade of corporate credit. It was all in the 2nd part of Fed chair Powell’s speech where he said rates “remain just below the broad range of estimates of the level that would be neutral for the economy”.
Fed Chair Powell’s Dovish stance was interpreted by the market that the Fed was near done with rate hikes
So that got the bots and carbon traders jammin to a new tune, the front end rate trade which sent the Dow soaring to over 600 points.
So has the Fed Chair Powell’s Dovish speech “lite the fuse” for an end of year stock rally?
The Fed’s policy shift from being an ardent hawk to neutral dovish unfolded just a few days before the 2018 G20 Buenos Aires summit between world leaders is scheduled to take place on November 30. Moreover, the Fed is furnishing the G20 Buenos Aires summit with a gift, accommodative monetary policy.
Fed Chair Powell’s Dovish stance could be a Machiavellian play
Fed Chair Powell’s Dovish stance makes the Fed on the global stage now look like “the good guy.” If the global economy slides into a deep recession/Depression and that brings financial markets crashing down the Fed’s benign transition to accommodative stance make those who blame the Fed appear to be feeble minded.
But while all the attention is being focused on the future trajectory of the Fed fund rates little is said about whether the Fed will continue to unwind its massive 4 trillion dollar balance sheet. It is the latter, in the era of post-quantitative easing (QE) which is most likely to determine whether the bull market continues or the market crashes.
So Fed Chair Powell’s Dovish stance takes the spotlight off the Fed as the culprit for the Depression/ stock market crash, instead, all eyes are now on the Trump Administration’s trade war with China.
Market psyops could be working. Chances that the central bank raises rates twice or more in 2019 are now just 33%, down from 37% following Fed Chair Powell’s Dovish speech November 28.
The bearish view is that Fed Chair Powell’s Dovish stance is designed to mitigate the downturn that will occur when the Trump Administration announces “no progress” with China following the impending G20 conference. This view argues the trade war will eventually escalate to include threats to US bond markets, the USD. The end game, according to this view, is a shooting war with China. The bears argue that Trump is following the same path as Herbert Hoover preceding the crash of 1929 and the Great Depression that led to WWII. Moreover, Trump’s trade war will provide a perfect distraction to the masses as the central banks “pull the trigger” QT.
The bulls argue that Fed Chair Powell’s Dovish stance is a calculated effort to pressure President Trump to make real progress at the G20
So what will it be, all aboard the Trump train rally heading into the new year or standby for the Trump Depression?
Fed Chair Powell’s Dovish stance is likely to trigger volatility, just what the saddle traders likes.