The Fed Timeline
I have written a number of articles during the fall that the Fed will have to pause and reverse much sooner than the market has expected. So, let's look at what has been communicated before.
On the 3rd of October 2018 Powell claimed we are likely a long way from normal with the following quote.
We may go past neutral, but we're a long way from neutral at this point, probably.
This was the start of the equity sell-off during the fall, which lasted until Christmas. On the 19th of December 2018, the Fed hiked rates and lowered 2019 guidance to 2 rate hikes instead of 3. The most damaging comment was likely to communicate that the balance sheet normalization was on autopilot. This caused the market to accelerate the decline.
The equity market reversed after Christmas from having been a bit oversold in the short term. On the 4th of January 2019 we saw a non-farm payrolls number coming in strong at 312K instead of the consensus estimate of 177K. On the same day, the Fed also communicated the data dependence, more or less taking back the autopilot comment.
We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2%,
The market has almost ruled out further rate increases during 2019 and the focus is primarily on the balance sheet normalization. It is true that we have seen some more dovish comments from Fed officials since then.
This Friday the 27th of January, a Wall Street Journal article highlighted that the balance sheet normalization might come to an end much sooner than what has previously been communicated. While I have argued this for some time, the market started pricing this in with equities increasing and gold went above $1,300/oz level for the first time in 6 months.
There are a few takeaways from this article. The Fed has certainly become more dovish over the last few months. The price increase in gold is likely a good indication of what will happen, if or when the Fed pauses quantitative tightening. However, the WSJ article is in my view simply speculating what can happen, there is very little tangible information in that article which would justify the market pricing this in already.
If the Fed confirms that the balance sheet normalization will end, gold will likely continue to climb, but I would caution against assuming this being the time the Fed throws in the towel. I certainly expect them to do so in 2019, but I would be hesitant to assume this is that time simply based on the WSJ article and market action.
Don't misunderstand me, I am still very bullish on commodities, but the action on Friday could just be that the market heard what it wanted to hear and extrapolating the dovish trajectory. I am still not bullish on U.S. equities at this level.