The market has been in party mode for 48 hours since Fed Chairman Jerome Powell said the central bank is taking a data-driven stance when setting interest rates. This is best seen on the Nasdaq Composite COMP.
which rose 4.1% on Wednesday, then 1.1% on Thursday.
Alfonso Peccatiello, author of The Macro Compass blog, put it succinctly: “You give the markets the green light to freely design their probability distributions across all asset classes without any anchors – and this explains the gigantic increase in risk,” he said. “If the Fed is so dependent on data, and there is basically one data that it cares about, it all comes down to where inflation will go in the near future – and the bond market has a very, very strong opinion on this issue.”
And not just the bond market. “Inflation could come down,” Tesla TSLA chief executive Elon Musk tweeted.
“Tesla product prices are falling more than they are rising.” Of course, not necessarily for their products. When asked if Tesla prices would rise, he said, “It’s too early to say for sure.”
Bill Ackman, founder and CEO of Pershing Square, agrees in part. He is the author of a tweet storm in which he said that inflation will start to fall soon. But he is convinced that Powell & Co. made a mistake when the central banker said that the federal funds rate, between 2.25% and 2.5%, was in the neutral range, a level that does not restrict or stimulate the economy.
“A neutral rate of 2.25-2.5% only makes sense in a world where inflation is stable at 2%. It doesn’t make sense in a world with 9%, 6% or even 4% inflation. Powell’s view of the neutral rate has only significantly eased financial conditions, exacerbating the inflation problem and making his job more difficult,” Ackman said. In past episodes of inflation, he said, the Fed had to raise rates above the prevailing level of inflation to stop it.
Ackman said the Fed needs to clarify how it came up with the idea that the rate is neutral. Powell answered that question more directly at a June press conference when he was asked if inflation at the high level it predicts on the scatter chart, just below 4%, would break the Fed’s rate. “I think the neutral rate is pretty low these days. I think so, but you know what? Let’s find out by experience. We are not going to be entirely model driven in this matter. We will monitor this, closely monitor and respond to incoming data both on financial conditions and what is happening in the economy.
Akman is not a disinterested party. In late May, he said his Pershing Square fund had already monetized “a chunk” of a derivatives rate on short positions in TMUBMUSD02Y Treasuries.
with a profit of $1.4 billion.
The 2-year Treasury yield, which is closely linked to the federal funds rate, fell 9 basis points on Thursday to 2.87% and has been down four of the last six trading days.