Bull Market, Meet Your New Fed

https://trendmacro.com/system/files/reports/20180129TrendMacroLuskin-D1.pdf
Donald L. Luskin
Monday, January 29, 2018
Since TCJA, one new 2018 hike is expected. Stocks and yields agree it’s not a tightening.
US Macro
Federal Reserve
US Bonds
US Stocks
The Fed comes into Yellen’s last FOMC perfectly neutral according to its model. Markets have built in one more rate hike for 2018 since TCJA was enacted, which means a growth acceleration is expected, to which the Fed will index rates – but not tighten. The GDP miss does not indicate economic weakness, but a surge in demand mirrored in rising debt service ratios. Equity valuations have moderated since TCJA, earnings growing faster than stock prices, and will not be a factor for the Fed. Powell will continue the Fed’s policy of gradual hikes in turn with the natural rate of interest. He may talk tough in his early months as chair to establish the impression of independence, but he is Mnuchin’s puppet. The back-up in bond yields, mostly explained by growth in inflation compensation, confirms that the Fed is not expected to tighten policy as the economy accelerates, even as it hikes rate in synchrony with it. A gradual back-up should continue.