1) The Fed: The most plausible “pauser”

We have used the 2007 = 2023 analogy a few times already this year and we continue to find coincidental evidence that looks a lot like the emerging pressures built up in the quarters receding the financial crisis.Chris Waller of the FOMC really moved market pricing earlier this week with an answer to a question on the Taylor rule at a Q&A session.“If inflation continues to cool for several more months, maybe three to five months and US central bankers feel confident it’s headed in the right direction, the Fed could lower the policy rate just because inflation is low,” Waller said.

This opens the door for a 2007/2008 reaction function in markets, where market-based financial conditions ease markedly, while the underlying impulse of the economy is weakening. A pause is generally equal to easier financial conditions, both during a pause after a hiking cycle and a pause after a cutting cycle (see chart 2).In his prepared remarks, Chris Waller referred to market-based financial conditions by stating that “…. the recent loosening of financial conditions is a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job.”

It accordingly remains up in the air whether Chris Waller intended to break the feedback loop of the FCI-based reaction function introduced by Powell at the last presser. We continue to see a very strong data seasonality in US key figures in November/December with strong spreadsheet underpinning of the 2x ISMs, the NFP, and the CPI report ahead of the FOMC meeting, but the data in the US will likely allow for a continued lax approach to the Fed Funds path on the other side of New Years.

Chart 1: The credit impulse ahead of 2024 looks recessionary