Repeating Spreads

What a difference a year makes. As 2017 finished up, the Federal Reserve was widely seen as turning “hawkish.” Inflation in the US, many believed, was about to be unleashed by a blistering labor market so tight we’ve not seen anything like it in decades. The central bank would be forced into a quickened pace of “rate hikes” attempting to head off the inflation monster before the economy became too good.

As it has turned out, there were no extra rate hikes in 2018. If anything, there was a confounding technical adjustment instead. The unemployment rate has remained low enough, but inflation has been a product purely of crude oil prices. And not even high WTI, rather still an uptrend coming off the last low. There was a lot about 2017’s Reflation #3 that struck awfully hollow.

The exuberantly hawkish Fed has slowly morphed into something completely different right before our eyes. Whereas at the end of 2017 “they” forecast perhaps five or even six increases in the federal funds corridor, approaching the end of 2018 “they” now wonder if there might only be three or perhaps two in 2019. Something has changed.

Federal Reserve Chairman Jerome Powell and his colleagues are likely to turn more wary about marching interest rates higher after delivering a widely anticipated quarter percentage-point increase in December.

Prospects for slowing global economic growth, fading U.S. fiscal stimulus and volatile financial markets all argue for more caution once officials lift rates next month near or into neutral territory, where policy neither spurs nor reins in economic activity.

Not quite the booming economy if there are too many “headwinds”. Everyone had been expecting all that dollar stuff in the first few months of the year would fade. They claimed T-bills, Korean war, trade war, and a host of other explanations that were supposed to amount to “transitory” disturbances of no official import. Powell had his unemployment rate rated ahead of everything else.


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