To The Moon

This FOMC release can be said to be a shorters' ecstasy.

I guess many of you will be more confused when you see the morning's broad market movements and news tweets, what happened yesterday? Why did Powell say it was appropriate to slow down rate hikes, but then said the terminal rate would be higher than previously expected? Why slow down rate hikes in December while saying it is too early to consider a pause in rate hikes?

With all this seemingly dovish and hawkish mix of information, why did the market end up plummeting?

The answer is: while we are still concerned about how much to raise rates in December, the Fed has shifted its focus to the duration of the rate hike.

I have an apt analogy for this shift in focus: Imagine the rate hike as Powell putting a stone on the back of a person who wants to lose weight, 2.5kg for the first time, 5kg for the second time, 7.5kg for the third, fourth, fifth and sixth time, and then Powell says, "For the seventh time, we will only put 5kg, and we won't put such a heavy stone after that, want to breathe a sigh of relief? Then he pointed to the far side of 1000 meters away and said, "Let's go, I will give you some more on the way, but not so heavy again.

Then Powell also added that 1000 meters is not the end, if the weight loss is not significant we need to continue to walk, as to how far (long term) depends on when you lose weight successfully (inflation down to 2%).

So for the market, a 50 basis point rate hike in December (the 7th time to reduce the weight of the stone) is still good news?

To sort out the market reaction in the order of release.

2:00 The Fed's official website released a statement (Federal Reserve issues FOMC statement) with nothing new in the other paragraphs and the only new information described as follows

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

The market tends to interpret the above passage as a 50 basis point rate hike in December, with the probability of a 50 basis point rate hike in December elevated and the probability of a 75 basis point rate hike reduced. The broader market immediately rebounded, but the rebound was limited. Because while alluding to a 50 basis point rate hike in December and at the same time being very adamant about fighting inflation to the end, and saying that a continued increase in the target range (of the federal funds rate) would be appropriate.

Meaning that it will continue to raise interest rates terminal (no dot plot release for this meeting, only the quarter-end FOMC will release the dot plot)

Time came to 2:30 press conference.

At the meeting Powell clearly said that the terminal interest rate level will be higher than previously expected. The meaning is clear, although the single rate hike is lower, but will face more number of rate hikes as well as a longer hiking cycle, the market reaction immediately turned down.

At the same time, the 50 basis point rate hike in December is expected to be slightly lower. However, the number of rate hikes in December is no longer meaningful, even if it is only 25 basis points in December, but the increase in the terminal rate and the extension of the hiking cycle have become the focus of attention next year.

Later in the conference Powell continued to emphasize the determination to fight inflation, the magnitude of the determination seems to merge with the eagle behind. A pause in interest rate hikes he would not consider at this time, and believes that the level of interest rates should be constantly raised, and a new summary of economic forecasts will be updated in December.

Powell this time so hawkish, can not help but make some speculation, whether it is the result of communication with all the old-timers, or already know in advance the CPI data in October?

Finally, to review the previous article, although I guessed the operation of lifting the terminal from the conclusion, I did not expect Powell to start discussing the issue of the duration of rate hikes at the November meeting, a topic I thought would be the focus in December.

Thanks to tiger friends support. If you are interested in options, you can join my discord：Options YYDS​​​​​​​​​​​​​​

also tiger options group：Tiger Options Club