The bond market's wild moves following FOMC meeting
Brian Cheung joins Myles Udland, Brian Sozzi, and Julie Hyman to discuss the implications of Bullard's comments on Fed Chairman Jerome Powell officially opening taper discussions and what this could mean for the market moving forward.
MYLES UDLAND: Brian Cheung joins us now for the latest on Bullard's comments, and Brian, on what's going on in the world of Fed commentary. So we knew directionally where Bullard, along with Bob Kaplan, Dallas Fed president, would be on the dot plot. Thank you, President Bullard, for clarifying that you are looking for a rate hike in the second half of 2022. But this I guess, begins what is likely now, Brian, to be a couple of pretty noisy weeks of Fed commentary, as everyone comes out and raises their hand on where exactly they fell given last week's summary of economic projections, or this week.
BRIAN CHEUNG: Yeah, absolutely, Myles. And I know that you're waiting for all these Fed presidents to come out with their own substacks, so they can explain these positions in depth. But we did hear from St. Louis Fed president Jim Bullard on CNBC this morning, the first major Fed appearance since the blackout lifted just yesterday. So this is kind of the beginning period, if you will, of the Fed speakers the 18 members of that policy-setting FOMC going out into the world and voicing their thoughts.
And at least from the St. Louis view, Bullard was telling CNBC that it's natural for us to have tilted more hawkish. He said that the inflationary impulse was more intense than the Federal Reserve was expecting, which explains why Bullard himself had penciled in one rate hike by the end of 2022. He said that would likely happen in late 2022, and that's because of his projections for inflation that would be above where his colleagues possibly saw inflation going, at least in 2022.
And this is all looped into that dot plot chart, which you can see ahead of you. This is the beginning of Fed watchers beginning to try to tie which dot is associated with which Fed policymaker. And we have to remember, guys, that this is going to be a very interesting next few weeks with all these members going out and speaking. Just next week I've counted 10 Fed speakers that are scheduled to make remarks, including Jerome Powell himself on Tuesday when he's going to testify in Congress yet again.
So this could be a very noisy week next week, especially with regards to the bond market, if it is indeed the case that the 10-year blinked in response to those Bullard comments this morning. I mean, we did see the 10-year go down as much as, go down to as low as 147 basis points early in the morning before he spoke. But while he was speaking, it seemed to spike up to let's call it something closer to 151 basis points. It's since had of comedown a little bit since then.
Now of course, I want to point out a few number of things. Bond markets can move for a number of reasons, and specifically today, there is quadruple witching, which we need to watch for. There's the expiry of stock index futures, stock index options, stock options, all these other things that could be contributing to some volatility in the bond market as well. So it's going to be very noisy on this Friday, especially maybe into the last hour of trading. It's definitely worth watching. Not many other Fed speeches on dock today. But again, next week, guys, could be very, very interesting to watch.
JULIE HYMAN: And so as we're watching these speeches, as we watch the bond market reaction, I think back to past Feds, Brian, where yes, you got some dissent maybe, you had the different Fed officials just saying different things, but ultimately, it was the Fed chair who was making the decisions. That seemed pretty clear in past Feds. How should we be thinking about this Fed and all of that other commentary?
BRIAN CHEUNG: Well, I think first of all, we need to lay out the idea that dissent is going to look very different in this type of Fed framework than it did in previous frameworks. And the reason why, is because when we think about traditional dissent, what that literally means, is that people were voting against a policy action. However, we need to remember that despite the waves that were made in this week's policy meeting, nothing changed about the policy setting. I have to remind people that, because everyone is talking about rate hikes, rate hikes, rate hikes, because the dot plot changed.
But people are forgetting that the policy itself in the June meeting was completely unchanged. There were no changes to that $120 billion of pace of asset purchases that it's making per month, in addition to keeping interest rates at near zero. And that's going to continue to be the case in July. No one's expecting a surprise rate hike or the tapering to be announced that early. So the question here is, of course, yeah, well, if the decision is going to be the same, there's going to be no dissents and we don't really need to count which of those 18 policy members are voting members to figure that out.
What is interesting, is that that discussion about tapering is definitely diverging into many different viewpoints. And it's all going to hinge on where you see inflation. If you're worried about inflation running away, you want a policy reaction from the Federal Reserve that's going to tighten policy before you have to pump the brakes too hard, which explains why Bullard, for example, has a higher inflation forecast than the median on the FOMC. That's also coinciding with an earlier timeline for him to advocate for raising rates, which is why he's penciled in as 2022.
There are seven of the 18 members that penciled in at least one rate hike by the end of 2022, 13 of the 18 by the end of 2023. So this is going to be, again, a very interesting few weeks of commentary as all these Fed speakers provide their many different views on the economy, which would explain the divergence in the forecast that we saw earlier this week.
BRIAN SOZZI: Brian, you think Bullard's comments were perhaps a little too aggressive and that they might be walked back from other Fed members in the coming weeks?
BRIAN CHEUNG: Well, I think that's a question about the timing of the Fed speakers coming out, I mean, I think what might be one reason for the sensitivity, if you will, in the bond markets, is not necessarily that it was Bullard himself speaking. It's that he was really the first one to be going out after the FOMC meeting this week to begin speaking.
And again, who knows why the bond market was moving. Bond market's gonna bond market, as I say, which means that it could be the quadruple witching, it could be a number of other factors. But if they did blink, which by the way, I mean, make what you will of a two basis point move, but yes, I mean, it did definitely blink while he was speaking, but I think broadly speaking, we need to remember that the Fed officials are going to go out in the next few weeks and they're going to have a lot of different views.
Obviously, someone like Rob Kaplan from Dallas, who had already been advocating even before the meeting that he would like to have those discussions sooner and hinted that maybe he would even like the rate hike sooner than others, is going to be very different than what we're hearing from more dovish members, people who are advocating for keeping interest rate policies near zero. There are still five of the policy 18 members that see no rate hikes by the end of 2023.
Very different view than some of the people who are advocating for something like four rate hikes over that time horizon. So this is again, it's all about inflation, it's all about that viewpoint, and I think that's what's going to make the commentary so spicy in the next few weeks.
MYLES UDLAND: Yeah, and of course, we're just talking about the generic 10-year yields here, but it's really been the flattening along the curve that has created the most discomfort in the market. And that, of course, a response to if you have sooner than anticipated higher overnight rates. The front end of the curve will come up. The long end doesn't necessarily need to move with the same enthusiasm in that kind of situation.
But of course, we all got so excited to talk about an inverted yield curve back in 2019. Maybe we can just put that aside for a couple of years, mercifully let the shape of the curve do its thing on the side and we'll just stick to stocks here on Yahoo Finance, as we tend to. All right, Brian Cheung, thanks for helping us break down the week that's been in Fed commentary and as you highlighted for us, a busy couple of weeks to come.