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Federal Reserve Vows Patience in Monetary Policy

Roxanne – You Don’t Have to Put on the Red Light

For those who can remember, the Police had a top hit “Roxanne” in the late 1970s. In the opening line Sting sings, “You don’t have to put on the red light, those days are over,” which may as well have been the underlying message from the Chairman Powell. I anticipate the day when the press conference is more of a karaoke battle, so we can have more enjoyment and possibly clarity.

By announcing the Fed’s intent on patience, markets adjusted accordingly with the most riveting move being the degree of steepening within the yield curve. CEO Scott Colyer detailed earlier this week what the yield curve is saying and why the focus should be on a different metric for those looking for a more relevant timing mechanism:

To put the degree of steepening in perspective, consider what is happening in the bigger picture in the 30 and 10 spread. I used this as a compliment to Scott’s analysis. In a most basic premise, consider the yield curve in three sections:

The short end (< 2 years) is anchored by the Fed and liquidity concerns, 5-10 year is reflective of general economic activity and the long end of the curve has a larger focus on long-term inflationary concerns. In the analysis below, we notice the significant steepening of the 30 and 10 showing some market perceptions of inflationary concerns relative to the general economic activity.


In the past, we have seen the steepening at this level occur five times in the last 30 years. Three of those occurrences occurred at the beginning of a recession, which will make those who have been on the sideline for a while feel more justified. The problem with this comfort is that at each of those spots you had significant leverage in the consumer balance sheet, which is not the case today. For further analysis of this, review our multiple 2019 outlooks.

The other two points occurred in the mid-1990s, which have far more in common with today. The Fed also micromanaged rates in the 1990s and 1980s, which not coincidentally led to two of the three longest expansions in the last century. We have often said the economy resembles the 1990s better than most other periods…with one large difference. The recovery from a once-in-a-generation recession has limited the pace of growth, much like a rocket lacking escape velocity.

The corresponding language from the release, the preponderance of economic data and the elevated levels of negative sentiment seems to confirm the current state of the U.S. economy is much like 1998. A risk of recession has been elevated due to the progression of the long expansion but appears to be a bit off in the future and continues to look at both risk and reward with a slight skew to risk on assets. As the Federal Reserve appears to be saying, you don’t need to put on the red light right now.

For those inquiring, we purposely only used the beginning lines of the song Roxanne lest we go down a rabbit hole we cannot pull ourselves out of….


CRN: 2019-0107-7139R

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