The Federal Reserve, facing the daunting task of selling $8 trillion in assets acquired through freshly printed money, is inadvertently steering the financial system towards a potential crisis. The linchpin of our financial stability, the treasury market, could be at risk of a crash, with the added threat of exacerbating already soaring mortgage rates.
The Fed’s misstep in financing over $6 trillion in federal deficits has left it trapped in a precarious situation, and the consequences will inevitably be borne by the public. The market is now engaged in a fierce battle with the Fed, unlike anything seen before.
Market futures are currently projecting the Fed Funds Rate to conclude 2024 around 4.00%. However, the latest Fed dot plot reveals a stark contrast, with FOMC members anticipating rates to finish at 5.125%—higher than market expectations. This discord implies a scenario where every member of the FOMC would need to be proven wrong for the market to be right, a situation where history suggests that fighting the Fed is a losing game.
Recent developments, such as the core inflation surging to 4%, double the Fed’s 2% target, further complicate the situation. The S&P futures market witnessed a significant reversal following this CPI number, revealing the market’s reliance on singular data points amid hot GDP and NFP figures. Additionally, Oracle’s cautionary outlook adds to the uncertainty.
As we navigate this precarious exit, the looming risk of financial instability underscores the need for vigilant monitoring of market dynamics and the Fed’s strategies. The coming months promise to be a critical juncture, with potential repercussions rippling through various sectors.
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The Fed has to sell $8 trillion of assets it bought with freshly printed money. That could crash treasury markets — the linchpin of our entire financial system. And it could hike mortgage rates that are already at a generational high.
The Fed screwed the pooch by financing over… t.co/XiCUyghutF
— FXHedge (@Fxhedgers) December 11, 2023
The market is now fighting the Fed more than ever before.
Market futures currently expect the Fed Funds Rate to finish 2024 at ~4.00%.
Meanwhile, the latest Fed dot plot shows FOMC members expect rates to finish 2024 at 5.125%.
Every member of the FOMC expects rates to finish… pic.twitter.com/nkwAFEpnHd
— The Kobeissi Letter (@KobeissiLetter) December 11, 2023
⚠️BREAKING: CORE INFLATION 4%
🔘Core Inflation Surges to 4%, Double the Fed's 2% Target
– 🌐 Global Impact: Concerns rise over potential recession as markets brace for tomorrow's rate hike decision. pic.twitter.com/1ALVuFdV4G
— The Coastal Journal (@1CoastalJournal) December 12, 2023
Big reversal of fortune in the S&P futures market on this CPI number. It appears that gamblers had pinned their FOMC hopes on a single data point after both GDP and NFP ran hot recently.
AND Oracle warned on outlook overnight.
Let's watch this exit. Should be interesting. pic.twitter.com/OAJ2CDL2cP
— Mac10 (@SuburbanDrone) December 12, 2023
The core CPI rose 0.3% in November from October, in line with expectations.
This held the 12-month core inflation rate at 4% and brought the six-month annualized rate down to 2.9% in November, from 3.2% in October.t.co/mnXQgghn4v pic.twitter.com/tSggtQBlJG
— Nick Timiraos (@NickTimiraos) December 12, 2023