GM. This is Milk Road Macro, the newsletter that watches Jerome Powell like your dog watches you eat a steak, intense, hopeful, and slightly confused.
Here’s what we got for you today:
- ✍️ Everything you need to know about this week’s Fed meeting
- 🎙️ The Milk Road Macro Show: How Stablecoins Are Taking Over The Dollar, Business, & The Federal Reserve w/ Santiago Santos
- 🍪 Trump praised Japan’s PM Takaichi and the alliance
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EVERYTHING YOU NEED TO KNOW ABOUT THIS WEEK’S FED MEETING
Welcome back to another Fed Week.
It’s the most important Fed week of your life (until the next one)...
But, in all seriousness - it is quite an unusual Fed week.
First, we’ve seen basically no US Government data for weeks and weeks, because the Government has been shut down.
This means voting Fed members will not have been able to study a large part of economic data, including jobs numbers and unemployment levels.
And second, the Fed could be making a big monetary policy shift this week.
It might end the Quantitative Tightening (QT) regime that began in 2022.
So, what’s going on with the data?
What’s going on with QT?
What will happen at the meeting on Wednesday?
And how will asset markets react?
Let’s take a look.
No data?
The US Government has been shut down since October 1 - meaning large parts of the Government deemed “unessential” have been shuttered.
This means we haven’t seen important economic data like payroll numbers, unemployment, retail sales, and some inflation metrics.
However, we did get one piece of Government data.
CPI was released on Friday last week as a special case.
And it was a “soft” inflation print overall - although it still remains elevated well above the Fed’s official 2% target.
CPI came in at 0.3% month-on-month (vs 0.4% expected) and 3% year-on-year (vs 3.1% expected.
Core CPI (which strips out the volatile food and energy sectors) also came in cool.
It was 0.2% month-on-month (vs 0.3% expected) and 3% year-on-year (vs 3.1% expected).
Rate cut largely expected
While CPI is still elevated year-on-year, the latest data was lower than expected - and this basically “sealed the deal” for a rate cut on Wednesday.
Interest rate traders are very confident that a rate cut will happen at this week’s meeting.
At the time of writing, they are pricing a 97.8% probability of a 25bps rate cut.
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EVERYTHING YOU NEED TO KNOW ABOUT THIS WEEK’S FED MEETING (P2)
And an end to QT?
Also, the Fed may stop its QT regime at this week’s meeting.
I covered this in detail here - including what QT is, why it matters and why it’s being stopped.
I had personally been expecting this QT halt to occur at the next Fed meeting in December.
But there have continued to be minor signs of stress in important dollar funding markets in recent days.
Analysts from JP Morgan and Bank of America are now forecasting that QT will likely be stopped at this week’s meeting.
In a note, JP Morgan analysts said:
“When Powell said that QT will likely end ‘in the coming months’ we heard this as December, which he may have meant. But developments since that speech lead us to think it is now more likely that the committee will just go ahead and end QT this week.”
How will asset markets react?
As I wrote in the most recent PRO report - the Fed is “running it hot”, and a recession is very unlikely.
So, rate cuts are generally bullish for risk asset markets overall.
But what about the initial market reaction to the Fed meeting this week?
What will happen during and immediately after the meeting?
In terms of any potential initial market reaction to a rate cut - it’s a similar situation to the September meeting.
The market is fully expecting a rate cut this week - so the rate cut itself is probably not that important.
The initial market reaction will likely be fueled by how forward guidance for future rate cuts shapes up.
The market is also currently very confident of a rate cut at the next meeting in December as well.
So, in my view, there isn’t really much room for Fed Chair Jerome Powell to deliver a “dovish surprise” in his press conference (be more dovish than the already very dovish market expectations).
It’s likely he’ll either largely meet expectations (neutral) or push back slightly on expectations (a “hawkish cut”).
So, in my opinion, it’s probably unlikely we’ll see a big positive initial market reaction to a rate cut.
Looking at a potential end to QT - I’m not sure how much of a market impact this will have.
As I wrote in a recent newsletter - an end to QT has been widely expected for many months and will likely only have a minimal liquidity impact on markets.
A QT halt might turn out to be a very small “bullish signal” for risk asset markets - but that’s about it.
If Powell offers up any forward guidance on how and when the Fed might start to increase its balance sheet again - this would be bullish.
But I think that is probably unlikely this week.
Wrapping up
We could well see both a rate cut and an end to QT on Wednesday.
But both of these things are widely expected.
So, while both could be considered bullish for risk asset markets - the initial market reaction to the meeting may be quite subdued or even negative.
Investors will be looking to Powell’s press conference for clues as to the future path of Fed policy.
I’ll be watching every word and sneeze from Powell - so you don’t have to.
And we’ll look in detail at what happened in Thursday’s newsletter.
That’s it for this edition - catch you for the next one.
THE FED, STABLECOINS & THE SHAKEUP 🚨
In today’s episode, we sat down with Santiago Santos to talk about how stablecoins are set to disrupt the dollar, business, and the Federal Reserve.
Here’s what you’ll hear:
- Why “skinny master accounts” could sideline banks entirely
- How stablecoins are quietly exporting the dollar across emerging markets
- Why Inversion Capital is betting on legacy businesses with crypto backends
- The role AI will play in automating finance with programmable money
Click below to watch now 👇
YouTube | Spotify | Apple Podcasts
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BITE-SIZED COOKIES FOR THE ROAD 🍪
Amazon is planning to cut as many as 30,000 corporate jobs - nearly 10% of its corporate employees. This would mark Amazon's largest job cut since late 2022, when it started to eliminate around 27,000 positions.
President Donald Trump hailed the US’s alliance with Japan, praising new Prime Minister Sanae Takaichi. “I want to just let you know anytime you have any question, any favors you need, anything I can do to help Japan, we will be there”, Trump said.
More debt is gradually coming onto the AI boom scene. Previously, the AI wave had been financed through the enormous cash flows of some of the most profitable companies on earth, but now the funding mix is changing.
MILKY MEME 🤣
ROADIE REVIEW OF THE DAY 🥛
