Two-Day Delivery

When Atlas sat to write this note, the working title was “What a Difference a Day Makes,” but less than 24 hours later, that tagline no longer fit. The Federal Reserve tightened monetary policy at its meeting in September by raising their target the overnight lending rate banks charge each other by one-quarter of a percentage point (currently between 3.75% and 4.00%), and the market expected more hikes soon. According to the CME Group’s FedWatch Tool, there was over a 70% probability that the range would be increased to 4.0%-4.25% later in October. That is no longer the case.

The New York Bank of the Federal Reserve System was given a more powerful voice when America’s current central bank was formed. It is the only one of the 12 Reserve Banks whose president is a permanent voting member of the Federal Open Market Committee (FOMC). The other Reserve Bank presidents rotate, with four of the remaining 11 having a vote at any one time. So when John Williams (New York Fed president) speaks, markets listen. On Tuesday he mentioned that there was “no need for urgency” when discussing tightening monetary policy further.

Almost immediately, the odds of a rate hike in October changed. It went basically to a coin flip. And even that didn’t last long. A day later (now Wednesday of this week), the Fed’s preferred inflation gauge was released, showing decelerating price growth; prices still rose but did so at a slower pace. That release nearly coincided with another leg down in the probability of an October hike. As of this writing, it stood at just a 24.9% chance of happening (even lower than the graph above suggests).

Markets have been volatile lately, and there are plenty of reasons for it. But sometimes it doesn’t take much to change a market’s mind. A few words on Tuesday coupled with an inflation report on Wednesday changed expectations. What a difference two days make.