The market has been in party mode for 48 hours since Fed Chairman Jerome Powell said the central bank was taking a data-driven stance in deciding interest rates. This is best seen in 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 are giving markets the green light to freely design their probability distributions across all asset classes without any pegs – and that explains the gigantic rally in risk “, did he declare. “If the Fed is so data-dependent and there’s basically one data it cares about, it all boils down to where inflation will go in the near future – and the bond market has a very, very strong view. on this subject.”
And not just the bond market. “Inflation may trend lower,” Tesla TSLA chief executive Elon Musk tweeted.
“More Tesla commodity prices tend to go down than up.” Of course, not necessarily for its products. When asked if prices for a Tesla would go up, he said, “too soon to say for sure.”
Bill Ackman, the founder and chief executive of Pershing Square, partly agrees. He is the author of a tweetstorm, where he said that inflation will soon start to fall. But he is convinced Powell and Co. made a mistake, when the central bank chief said a federal funds rate between 2.25% and 2.5% was in the neutral range, the 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 makes no sense in a world with 9%, 6% or even 4% inflation. Powell’s views on the neutral rate have only served to ease financial conditions materially, compounding the inflation problem and making his job more difficult,” Ackman said. In past episodes of inflation, the Fed had to raise rates above prevailing inflation levels to kill it, he said.
Ackman said the Fed should clarify how it came to the idea that the rate is neutral. Powell answered that question more directly at the June press conference, when asked if the Fed carrying rates as high as it forecast in the dot chart, just below 4%, would break. the back of inflation. “I think the neutral rate is pretty low these days. So I think so, but you know what? We will find out empirically. We’re not going to be completely guided by a model on this. We will be reviewing this, keeping our eyes peeled, and reacting to incoming data on both financial conditions and what is happening in the economy.
Ackman is not a disinterested party. In late May, he said his Pershing Square fund had already monetized a “piece” of a derivative bet shorting the TMUBMUSD02Y short-term Treasuries,
for a profit of $1.4 billion.
The 2-year Treasury yield, which closely tracks the federal funds rate, fell 9 basis points on Thursday to 2.87% and has fallen on four of the past six trading days.