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Ahead of today's FOMC statement and Powell presser, we said that the bogey for a dovish interpretation today will come not from the Fed's rate decision, which we knew would be unchanged, but the QT tapering decision...

The big question for today: how much will Fed taper QT by?

If Taper goes to $30BN (from $60BN/month), that means less funding needed in Q3 (most likely from Bills), and means less pressure on issuance. Yields should slide

... and sure enough, the fact that the Fed announced an accelerated QT tapering and it was bigger than expected ($35BN vs $30BN) is why the market is viewing the Fed announcement as dovish and futures are now soaring.

And while we wait for Powell's presser to conclude, here are some other hot takes from Wall Street strategists and thinkers:

David Russell, head of market strategy at TradeStation

“The Fed is still in wait-and-see mode before they get dovish. But the data hasn’t been cooperating. This statement keeps investors data dependent and focused on April numbers like CPI two weeks from now.”  

Audrey Childe-Freeman, chief G-10 FX strategist at Bloomberg Intelligence

“A first glance at the statement brings dollar bears some breathing space as the language adjustment is not as hawkish as may have been feared, though the reference about underwhelming inflation progress entertains a potential new layer of hawkishness at a later stage that could contain dollar downside ahead of the press conference. Muted dollar reaction so far captures this well.

“The language embraced thus far does not signal that the narrative has shifted back to new rate-hike debates, but rather to pushing back the timing on a rate cut. This is probably good enough for near-term euro-dollar relief given the feared hawkish pivot.”

Brian Coulton, chief economist at Fitch Ratings

“With unemployment still low and the labor market still tight, there is only a limited risk to the Fed’s employment mandate from waiting longer before embarking on rate cuts. On the other hand the risk of failing to get inflation down on a sustained basis seems to be rising as each week goes by. Patience is the watchword now for the Fed and the risk of fewer or no rate cuts this year is growing.”

Erica Adelberg, Bloomberg Intelligence’s mortgage-backed securities strategist:

“Making it explicit that any surplus MBS paydowns will be reinvested into Treasuries could adversely affect the MBS/Treasury basis, but at this point MBS paydowns are projected to be about half of the $35 monthly cap on average for the foreseeable future. The average loan rate backing the Fed’s MBS holdings is more than 300 bps below current mortgage rates, so it would take a significant interest rate rally to hit the MBS cap.”

Kathy Bostjancic, Chief Economist at Nationwide:

“We expect Chairman Powell will underscore this hawkish pivot in his press conference and emphasize that the timing of pace of rate cuts will depend highly on the future path of inflation. He likely will indicate the Fed is on an extended pause until inflation resumes its disinflationary trend.”

Ira Jersey, Bloomberg rates strategist:

“His lack of comment about the possibility of a hike is interesting, and I’d be surprised if he’s not asked about the potential for hikes in the press conference. But it seems that ‘on hold’ is his base case for now.”

Bloomberg Economics’ Anna Wong and Stuart Paul:

“For anyone wondering if this year’s hot inflation readings were just a blip, the May 1 FOMC meeting offered a clear answer: Hawkish tweaks to the statement show policymakers have lost confidence that inflation is moving in the right direction. At the same time, the Fed announced it would start tapering its balance-sheet run off in June – a month earlier than we expected — and will reduce the runoff cap by a bit more than we foresaw. That initially comes across as dovish, but the motivation here is key. If it turns out the Fed wants the run-off process to last longer — ultimately boosting the chance that its balance sheet will return to pre-pandemic size – that actually would be hawkish.”

Developing

As expected, no change in rates from The Fed, and a hawkish bias to the language changes in the FOMC statement.

The bigger than expected QT taper news is noteworthy and Powell will have to explain why they are 'easing' this policy more than expected while inflation remains 'out of control'... and they are not ready to cut rates.

So now it's down to Powell to avoid a faux pas (as we detailed below) over shifts in The Fed's 'asymmetric' response function.

Watch Powell walk that tightrope live here (due to start at 1430ET):

*  *  *

As we detailed earlier, today's Fed meeting had the market feeling (and positioned for) “HAWKISHNESS,” especially after the ECI pile-on yesterday, which didn’t simply “upside surprise,” but re-accelerated to 1.2% after ending 2023 at 0.9%, and showing that persistent wage pressures further add to the risk of keeping inflation “too elevated” for the Fed.

However, according to Nomura MD Charlie McElligott, the largest risk with the Fed today is that there will be no summary of economic projections / no dot plots...

...meaning that outside of the usual statement, it will be Powell’s press conference alone that dictates market behavior... and the backtest on that is a bit dicey, with some historic faux pas in-sample.

He’s gotta find a way to “keep it in the pocket,” where his language simply must message “balance of risks”...

...which means (as we detailed earlier) that he dangerously must “toe the line” on widening out the Fed path away from currently asymmetric “when cut?”-messaging dating back to Dec ’23...

...and instead back to a two-way distribution with both ‘cut’ and honest-to-God ‘hike’ –optionality.

Nomura's rates guru Jonathan Cohn details just how narrow a path it is for Powell:

Powell’s FOMC presser and, in particular, his answer to the inevitable question around potential hikes represents a key risk.

Following meaningful policy path repricing since CPI and reorientation of Fedspeak, the bar for Powell to exceed market hawkishness is high.

Powell, pricing, positioning

What to expect

Statement:

Our economists expect two hawkish changes (see their preview here)

1. Change “inflation has eased over the past year, but remains elevated” to “inflation remains elevated”

2. Removal of “greater” in the Fed’s expectation that it would not ease rates “until it has greater confidence that inflation is moving sustainably toward 2%”

Presser:

• Powell’s FOMC presser will again be highly scrutinized, particularly his answer on whether hikes are in play. Bostic and Bowman flagged hikes as a risk and Williams did not rule them out, inviting a reassessment of two-way risk. Though Powell will likely maintain that policy is restrictive, he will also likely want to retain optionality amid high uncertainty around neutral. The phrasing of that optionality sentiment will be critical.

Is the market ready / priced?

• How much is priced: The market has repriced a lot, going from 63bp of cuts in 2024 pre-CPI to 28bp currently. Market-implied year-end rates for 2024 and 2025 are well above the median dots, granted the March dot plot had some ‘cuspy’ medians. The repricing owes primarily to sticky inflation arresting progress through H2 last year, though there has also clearly been a reduced ‘recession’ premium as well. In terms of hike appreciation, the market-implied probability of a hike by year-end is now around 15%, double what it was pre-CPI. Given the reorientation of Fedspeak amid this sticky inflation (i.e., less emphasis on cuts this year), there is a higher bar for Powell to exceed market hawkishness.

• Repositioning: At the front-end, there have been a couple waves of washouts in ‘sell hike’ trades like 1x2 payer spreads in the sell-off. An examination of open interest changes coupled with insights from our futures desk suggests a good deal of positioning post-CPI was rolled into lower strikes, not simply taken off. And with the increase in put OI in 94.625 (no cut) strike largely a function of buyers, those combining with sales in lower strikes (short skew) seem prepared for something like no cut or one hike scenario. Of course, the risk is that if Powell rhetoric around potential hikes is seen as hawkish and followed by strong NFP and CPI, we move quickly toward the low strikes as the market prices in a higher probability of multiple hikes and we get another positioning flush. I do think that if the Fed feels the need to change its directional bias and hike (not just stay on hold), one has to price in a high probability of multiple hikes, not a one and done. However, I still think there’s a very high bar for the Fed to pay more than lip service to open-mindedness.

QT slowdown

• The Fed is expected to announce a reduction in the pace of QT, likely to $30bn per month for UST. I wouldn’t expect much guidance on an end date. Slowing runoff should theoretically allow for a longer period of QT and lower ultimate level of reserves (thanks to more time for an efficient redistribution of liquidity) – a level around which uncertainty bands are very large.

Putting it together suggests a ‘middle of the road’ Powell can give way to a temporary relief rally, while a blundered characterization of hike optionality could lead to another position flush out and bear-flattening of the yield curve.

Hence, McElligott warns that with all this HAWKISH mentality / sentiment / positioning, the risk is that any surprisingly dovish Fed speak or Data (e.g. NFP Friday), you COULD see potential for an outsized SHORT SQUEEZE / RALLY RISK on stops.

Tl;dr: The Fed just told the market that 'yields are too damn high'.

*  *  *

Since the last FOMC meeting, on March 20th, gold has been the biggest outperformer (interesting along with dollar strength), while stocks, bonds, and crude (and crypto) have all been sold (with bonds and oil equally ugly)...

Source: Bloomberg

And since March 20th, US macro data has serially disappointed...

Source: Bloomberg

More problematically, since the last FOMC meeting, inflation data has dramatically surprised to the upside and growth data to the downside - screaming stagflation in the face of the Fed...

Source: Bloomberg

Rate-cut expectations (for 2024 and 2025) have plunged significantly since the last FOMC (that is now just one 25bps rate-cut priced in for 2024)...

Source: Bloomberg

Expectations are fully priced for a nothing-burger today on rates...

Source: Bloomberg

... with a slight hawkish bias in the language-changes in the statement (and the possibility of QT-taper signaling). But it will be Powell's press conference that everyone will be focused on.

So what did The Fed say?

Rates unchanged...

• *FED HOLDS BENCHMARK RATE IN 5.25%-5.5% TARGET RANGE

Key statement changes

Fed adds following sentence:

"In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective."

Fed also replaces

"The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance"

with

"The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.

And the QT Taper is here - and its bigger than expected (-$35BN/mth vs -$30BN expected):

Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.

The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities

This means $105BN less gross issuance needed in Q3, with The Fed implicitly saying 'yields are too high'.

Just as we said...

The big question for today: how much will Fed taper QT by?

If Taper goes to $30BN (from $60BN/month), that means less funding needed in Q3 (most likely from Bills), and means less pressure on issuance. Yields should slide

Read the full redline below:

What happens next (on average)?

Lululemon's founder is taking on some lu-lu-leverage - and it's coming at a time when Lululemon's stock is more than 20% off its recent highs. 

Chip Wilson, the founder of Lululemon, has reportedly used a significant portion of his stake in the company to secure financing from Goldman Sachs Group Inc., according to a new report from Yahoo/Bloomberg. 

According to a recent regulatory filing, an investment firm representing the Canadian billionaire pledged 1.8 million Lululemon shares, nearly 20% of his total holdings, as collateral for a $200 million margin loan from the US bank.

Wilson's stake, valued at approximately $660 million based on Tuesday's closing price, comes at a challenging time for Lululemon, with its stock declining by 25% since late March due to disappointing US sales and sales projections.

While representatives for Lululemon and Wilson declined to comment, this transaction sheds light on how wealthy individuals leverage their public holdings for substantial liquidity. For Wilson, who relinquished daily management of Lululemon over a decade ago, it signifies a broader investment diversification strategy.

The report states that the 69-year-old entrepreneur has expanded his investments beyond Lululemon, increasing his stake in Amer Sports Inc. and establishing a real estate firm, Low Tide Properties, among other ventures.

Additionally, he is actively investing in research to find a cure for his rare form of muscular dystrophy.

Pledging shares as collateral is common among the ultra-rich, with examples including Elon Musk leveraging Tesla Inc. stock for personal loans.

While borrowing against shares offers tax advantages, it also carries risks, as evidenced by margin calls during market downturns, such as those experienced at the onset of the pandemic.

Wilson founded Lululemon in 1998 and stepped down as chairman in 2013 following controversies and disagreements with the company's leadership.

Despite selling a significant portion of his stake a decade ago, he retains control of approximately 8% of Lululemon's shares, making it his largest individual asset.

Now he better hope yoga pants stay in style...

Proponents of gold and bitcoin often hail from the same ideological background: Austrian economists, dollar bears, Libertarians tired of State manipulation of fiat currencies and, generally, the anti-Fed crowd. Yet shared principles have not eased the age-old rivalry between the two assets.

Relative to Bitcoin, gold lost considerable value last year as an ounce of gold fell from 0.11 BTC to almost 0.03 BTC, a historically important level. The last month has seen the precious metal rebound somewhat relative to 'digital gold':

However, as Benjamin Graham said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” So we are more interested in the fundamentals:

• Does Bitcoin’s instant transferability and infinite portability make it the superior asset/security? Or is it a worthless string of numbers with infinite substitutes?

• Will gold’s thousand-year history as the preferred monetary commodity continue in the digital age? Or does its reliance on third-party custodians (at least at scale), and significant bulk, make it inferior to BTC?

We’ll answer these questions - and more - this Friday.

On May 3 at 7pm ET, ZeroHedge is partnering with Crypto Banter to bring together top macroeconomic minds to debate.

In the anti-crypto corner is the man whose name is synonymous with “gold”, infamous crypto bear Peter Schiff. Alongside Schiff will be “Dr. Doom”, renowned economist Nouriel Roubini.

Arguing in favor of crypto will be Anthony Scaramucci - wealth manager with over $10 billion in AUM - as well as day-one crypto veteran Erik Voorhees, founder of ShapeShift and torch-bearer for the asset class’ libertarian roots.

The debate will be moderated by Ran Neuner, founder and host of Crypto Banter, one of the largest digital asset news channels on YouTube.

Learn more about our VIP ticket offering to attend the debate in person and grab dinner with the participants here.

ZeroHedge would also like to thank our sponsors for this debate: Preserve Gold and BITLAYER — “Layer 2. The future of Bitcoin.” Whether you’re a fan of gold or Bitcoin, you probably see the wisdom in diversifying away from U.S. dollars. Do so by visiting their websites and checking out their products.

ZeroHedge Goldbugs can access a special offer from Preserve Gold by texting “ZERO” to 50505.

Federal prosecutors are investigating compliance issues at Block, the fintech firm co-founded by Jack Dorsey, according to a new report from NBC, citing "two people with direct knowledge". 

Questions about the company started swirling back in March 2023 when short seller Hindenburg Research released a report called "Block: How Inflated User Metrics and “Frictionless” Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billion". 

In it, they concluded that "the 'magic' behind Block’s business has not been disruptive innovation, but rather the company’s willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics."

Now, a former employee has shared documents revealing insufficient customer information collection, transactions involving sanctioned countries, and cryptocurrency dealings with terrorist groups, the latest report from NBC says.

The employee claims many transactions weren't reported as required, and Block failed to address the breaches despite being notified. The documents detail transactions with entities in sanctioned countries, including Cuba, Iran, Russia, and Venezuela, as recent as last year.

One former told NBC: “From the ground up, everything in the compliance section was flawed. It is led by people who should not be in charge of a regulated compliance program.”

“It’s my understanding from the documents that compliance lapses were known to Block leadership and the board in recent years," Edward Siedle, a former Securities and Exchange Commission lawyer who represents the former employee and participated in the discussions with prosecutors told NBC. 

Cash App, a mobile payment platform under Block's ownership, faced allegations of compliance failures from two other whistleblowers in mid-February. Introduced in 2013, Cash App enables instant money transfers and stock and Bitcoin purchases. By December, it boasted 56 million active transacting accounts and $248 billion in inflows over the previous four quarters.

Block commented to NBC: “Block has a responsible and extensive compliance program and we regularly adapt our practices to meet emerging threats and an evolving sanctions regulatory environment. Our compliance program includes systems, tools, and processes for sanctions screening, as well as investigating and reporting on sanctions issues in accordance with our regulatory obligations."

They continued: "Continually improving the safety and security of our ecosystem is a top priority for Block. We have been and remain committed to building upon this work, as well as continuing to invest significantly in our compliance program.”

Federal prosecutors are also examining Square, another key component of Block's operations, which serves millions of merchants. According to documents provided to prosecutors and reviewed by NBC News, Square allegedly failed in basic customer due diligence on international merchant sellers and mistakenly reimbursed some merchants' funds frozen for sanctions violations.

The documents also reveal that new customers triggering sanctions alerts were allowed to conduct transactions before resolution, with instances of inadequate screening against sanctions keyword lists, the report adds.

Cash App, due to its design, also apparently heightened compliance risks, NBC wrote. A document highlighted the challenge, stating that stored balances in Cash App are typically depleted by the time of review, limiting the platform's ability to block or reject funds.

The former employee also informed prosecutors of findings from an external consultant hired by Block, which identified nearly 50 deficiencies in monitoring suspicious activities and screening for sanctions violations.

Board members including Lawrence Summers and Sharon Rothstein have also recently departed the company.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

In an op-ed for the Washington Post on November 5, 2010, Ben Bernanke did a victory lap, praising the Fed’s efforts in stemming the financial crisis. In the article, he discusses how QE and other Fed policies eased financial conditions, bolstering investor confidence.

And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion. 

If Bernanke wants credit for his Fed policies that boosted stock prices, he should also take responsibility for the costs. Those same monetary policies, which have been repeated many times since 2008, have played an important role in exacerbating the wealth gap in America. Accordingly, we should question his use of the term “virtuous circle” to describe how modern monetary policy works.

Graphing The Wealth Gap

Inspiration for this article comes from our recent article, Wealth Gap and the Road to Serfdom.

Before discussing the Fed’s role in widening the wealth gap, we put context to the problem. The graphs and quote below are from the article.

For 80% of Americans, the end game of too much debt, an aging demographic, and the push for “socialistic policies” is the continued extraction of wealth from the “middle class” to the “rich.”

Trickledown Economics and Monetary Policy

“Trickledown economics” was coined by John Kenneth Galbreth in 1982 and made famous by President Ronald Reagan. The expression is another name for supply-side economic policy. The policy theorizes that the populace benefits when government interference in the economy is minimal. For example, lower taxes and reduced regulations should promote economic activity and prosperity for the entire populace.

The theory is logical, but politicians have done a poor job enacting it.

In 2008, the Fed took a page from the supply-side economic playbook to stem the financial crisis. From that point forward, the Fed’s modus operandi has been trickle-down monetary policies.

Does QE Trickle Down?

Ben Bernanke wasn’t the first Fed Chair or central banker to use QE. But he did make it a household name and seemingly a permanent tool in the Fed’s toolbox.

QE has two significant impacts on the financial markets and the banking system.

First, removing assets from financial markets alters the supply-demand balance in favor of higher prices. Additionally, when investors believe QE is positive for asset prices, as is the case, demand increases, which provides even more impetus for higher asset prices.

Second, the Fed buys bonds from the banks with reserves. Reserves are a form of money that is only viable in transactions between banks or with the Fed. Reserves support bank loans and asset purchases. Therefore, when more reserves are available, banks can more easily make loans and buy assets. Further, some bank loans, specifically margin or repo loans, generate additional demand for assets.

The scatter plot below shows the positive correlation between the one-year percentage change in margin debt and the Fed’s balance sheet.

Higher stock and asset prices coupled with more leverage is a winning combination for investors.

The Graph of All Graphs

With that explanation of how trickledown monetary policy bolsters asset prices to accomplish the Fed’s goals, we share a graph explaining why the Fed’s policies widen the wealth gap.

Since 1990, the dollar’s purchasing power has declined by over 50%. At the same time, the S&P 500 has risen by over 1,300%. Those with a sufficient portfolio of stocks could more than offset the decline in the dollar’s purchasing power. Those without stocks are left behind.

Further, it doesn’t help that real household income for the lowest 20% has been unchanged since 1990. Over the same period, they have risen by about 50% for those in the upper 20% of incomes.

Share Of Wealth

The wealthier have seen their wages and the value of their financial assets rise much more than inflation. At the same time, the lower wealth and income classes have seen marginal real income gains at best and little in the way of benefits from rising stock prices. 

The two graphs below show how the percentage of the wealth owned by the top 1% and the change in the S&P 500 are well correlated.

On the contrary, the aggregate wealth of much of the bottom half of the nation, as a percentage of total wealth, has a negative relationship with the S&P 500.  

There is a straightforward explanation as to why the correlation between the share of the wealth of the rich versus that of the rest of the population has opposing correlations to the S&P 500. 10% of the population holds nearly 90% of the stocks.

Trickledown Monetary Policy Handicaps Capitalism

QE and other Fed policies may help the economy on the margin and save some jobs. However, there is little evidence that, over the longer term, the economic benefits increase the prosperity of most of the populace. Further, as we share, there is compelling evidence it further exacerbates the wealth gap.

Capitalism has proven to be the best economic system for growing the wealth of the entire population. A key tenant of capitalism promises financial incentives for those who work hard and have unique skill sets. That incentive results in productivity gains, which benefit economic growth and allow for higher wages and a broad distribution of wealth.

Unfortunately, when financial incentives are not only a function of capitalism but also an offshoot of government and Fed policies, the benefits of capitalism are reduced.

For example, Elon Musk is extraordinarily wealthy and should be rewarded handsomely for everything he has accomplished. However, how much of his wealth is based on his hard work and ingenuity, and how much was gifted to him by the Fed via their stock-boosting monetary policies. While slightly off-topic, we should also question how much of his wealth is attributable to government subsidies for electric vehicles. 

Summary

President Biden’s poll numbers on economic confidence are poor despite robust economic growth and a historically low unemployment rate. While there are many reasons for the odd divergence, we think it’s fair to say that the benefits of the post-pandemic growth spurt have disproportionately accrued to those in higher-income classes and those with stocks. Those left behind, representing a large majority of the population, are not confident in Biden’s handling of the economy and suffer from higher prices.

Most Americans continue to see wages that cannot combat inflation and have little to no wealth invested in the stock market. Can you blame them for lacking confidence?

QE may have served as an emergency way to add bank reserves to the system and boost confidence. However, its continued use, even during economic prosperity periods, only makes the wealth gap wider.