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The Fed Delivers a Baby, Gold Jumps

Gold jumps and bonds are muted following the Fed Chair's Senate confirmation hearing.
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Federal Reserve Chairman Senate Confirmation

Aggressive Stimulus Not Needed

At his confirmation hearing today, Powell tells the Senate Economy No Longer Needs Aggressive Stimulus

The central bank will use its tools “to prevent higher inflation from becoming entrenched,” Mr. Powell said Tuesday at his confirmation hearing before the Senate Banking Committee.

Mr. Powell said he hoped there would be “a return to normal supply conditions” this year but added, “if we see inflation persisting at high levels longer than expected [and] we have to raise interest rates more over time, we will.”

“What we have now is a mismatch between demand and supply. We have very strong demand in areas where supply is constrained,” such as for cars, he said.

The main question for the Fed this year boils down to “how are those two things going to get better into alignment,” he said. “A part of the answer is going to be through shifts in demand.” The Fed typically lowers interest rates to boost demand and spur more growth, and it raises them to slow down the economy and curb demand.

It is really time for us to move away from those emergency pandemic settings to a more normal level,” Mr. Powell said. “It’s a long road to normal from where we are.”

The Fed Delivers a Baby

Actually, it was obvious 7 months ago that it was time to move away from "emergency" conditions.

The Fed decided to deliver a baby instead. 

In two more months, the Fed will finally finish tapering. Then we see what kind of baby steps the Fed makes. 

Fed officials have dropped hints they may start shrinking their asset portfolio soon after they raise rates, which would be another form of tightening policy. Mr. Powell said such a process could begin “perhaps later this year.”

Perhaps later, perhaps not. 

Gold Reacts 

Gold reacted to the expected March delivery up $19 as of about Noon Central. 

Bond yields are muted, a couple of basis points lower. 

The Bond Market Reacted to Hawkish Fed Meeting Minutes Days In Advance: Why?

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Treasury Yields December 15 to Date 2022-01-05

Bond Market Reacted In Advance of the Minutes - Why?

1: Convenient Leak?
2: Lucky Guess or Random Events?
3: New Economic Data?
4: Brilliant Trading?

I cannot find any evidence of #3 but I suppose I might have missed something.

Regardless or the answer, it is meaningless over long haul, but if it's a leak, it's important, especially to those impacted or front-running the trade. 

The minutes did contain a couple of of interesting items that most missed including an important discussion of the Effective Lower Bound. 

For discussion, please see my January 5 post, The Bond Market Reacted to Hawkish Fed Meeting Minutes Days In Advance: Why? 

Meanwhile the Fed is not committed to anything but baby steps, if that, as noted in testimony today.

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