Monetary Policy Changes

This time Is different We don't often say that about the Fed, but after yesterday's FOMC meeting, we think it may actually be true. In fact, we believe yesterday's meeting ushered in a new era of monetary policy in the United States.    For the better part of two decades, monetary policy has followed a familiar playbook: extensive forward guidance, frequent communication, data dependence and the  Federal Funds rate as the primary policy tool. While leadership has changed, the broader framework has remained remarkably consistent.   What we heard yesterday suggests the possibility of a meaningful evolution.   We believe the Fed may be moving toward a framework that places less emphasis on signaling every move in advance and more emphasis on assessing where inflation, employment and broader economic conditions are heading. In a world of real-time data and increasingly sophisticated analytics, that could prove to be a healthier and more effective approach.   We also continue to hear indications that the policy toolkit could broaden beyond the overnight policy rate, with greater consideration of balance sheet policy, liquidity conditions, money supply dynamics and longer-term interest rates.   Importantly, change does not automatically mean more volatility. A broader set of tools and a more forward-looking approach could ultimately increase confidence in policy outcomes rather than diminish it.   For investors, the near-term message remains straightforward: inflation is still above target and remains the Fed's primary focus. While rate hikes are far from certain, they remain a possibility that markets need to respect.   That's one reason we continue to favor income-oriented fixed income opportunities over pure interest-rate expressions. And when markets overreact to uncertainty around policy change, we think there may be opportunities to sell volatility rather than buy it.   This time may indeed be different, and it will be fascinating to watch how this evolution in monetary policy unfolds. The real question is whether less signaling creates more uncertainty, or ultimately more confidence in the Fed's ability to achieve its objectives.

Here is a strategy I will deploy in my Macro Hedge Fund. Macro hedge funds should deliver uncorrelated returns to stock and bond markets by finding dislocations all around the world and across asset classes. So here is a potential macro dislocation we are tracking. All countries in the world have followed the Fed hiking cycle in lockstep. But not all economies can handle ''higher for longer'' equally well. Or in other words: high rates for long might actually ''break something'' in some of these more vulnerable economies. So - how do we rank countries and spot macro trade opportunities following this narrative? We developed a Vulnerability Score for each country (x-axis of the chart below: right = more vulnerable). It's based on: 1️⃣ Long-term growth potential We analyze future trends in demographics and productivity to gauge which countries have the highest/lowest growth potential to handle higher interest rates 2️⃣ Private debt vulnerabilities We look at the level and rate of change of private sector debt: have households and corporates levered up over the last 10 years and to which level? High levels of private debt + high interest rate produce a strong cocktail of vulnerabilities. We also look at the share of floating rate loans and mortgages as higher interest rates pass through more quickly in that case. And finally focus on the refinancing cliffs: how early must the private sector refinance at high rates? 3️⃣ Fiscal trends The US has the exorbitant privilege of issuing the world's reserve currency, and therefore deficits and bond supply are more easily absorbed. You can't say the same about other countries. 👉 The final result is the Vulnerability Score, which is the x-axis of the chart. If we want to find out which countries are the most exposed to ''something breaking'', we need to look into that red box. These countries are not only vulnerable, but the tightening cycle (y-axis) has been very intense as well. That's a dangerous cocktail. Canada, Sweden, New Zealand, EU, and UK qualify as the most vulnerable countries out there. And GDP growth in these countries is already flirting with 0%. It doesn't surprise me. What surprises me is the markets' obsession with ''when will something break in the US?''. The US is not the most vulnerable country to higher interest rates: slow refinancing cliffs, a lot of long-dated fixed mortgages, private sector not ultra leveraged compared to 2007. It's going to take longer for higher rates to hit the US economy this time. But other economies are already feeling the pain. What economies are the most vulnerable in your opinion? P.S. Enjoyed this macro analysis? Follow me (Alfonso Peccatiello) so you don't miss any post & stay updated on the launch of my Macro Hedge Fund! P.P.S. FREE TRIAL to my Institutional Macro Research? Join the biggest institutional investors in the world reading it every day - send me a DM and I'll set you up!

This week’s FOMC decision was not an easy choice. Our goals are in conflict. Inflation is above target, the labor market is softening, and there are risks to both sides of our mandate—maximum employment and price stability.   Two charts explain why I ultimately favored a rate cut.   The first shows the damaging cost of high inflation. It has chipped away at real earnings and weakened household purchasing power. Many Americans are still trying to catch up.    So, the FOMC must continue to bring inflation down. Anything other than 2% is not an option. But it matters how you get there. This means we cannot let the labor market falter.   Real wage gains come from long and durable expansions. And the current expansion is still relatively young, as shown in the second chart. Holding policy too tight can cause undue harm to American families and leave them with two problems: above-target inflation and a weak labor market.   Congress gave us two goals. And our job is to meet both of them. The recent policy decision puts us in a good place to achieve that.

The Fed has taken a significant step by officially initiating its cutting cycle, which holds profound implications for the financial world. ⚠️The #FOMC has cut the FFR by 50 Basis Points to a 4.75%-5% Range. ⚠️The latest projection of the Neutral Rate, R*, came in at 2.8% versus the previous estimation of 2.9% A cutting cycle might affect other central banks' stance on monetary policy because the US Dollar could devalue considerably going into 2025, making exports from other countries like Japan more expensive. For the past two weeks, business media has made a huge story out of a 25—or 50-basis point cut, but in my opinion, today's decision on the magnitude of the cut is meaningless. Financial conditions have eased considerably since July, so it should not be a surprise that the US economy might have already started to re-accelerate. The Atlanta Fed GDPNow is flashing a Real Growth Rate of 3% for the US Economy. If that materializes, it would mean that the US #Economy is already running 1% above its potential. Why financial conditions have already started to ease? Here are some examples: ✍️Mortgage Rates decreased from 7% in July to 6.15% today ✍️The 2-Year Yield decreased from 4.75% in July to 3.63% today ✍️The 5-Year Yield decreased from 4.06% in July to 3.47% today ✍️Housing Starts have picked up momentum What market participants have priced out is a resurgence of inflation during 2025. That scenario is entirely possible if the Dollar Index drops below 100. A cheaper dollar will make commodities and import prices more expensive for the US consumer, and a reduction in real income could squeeze even more of the low to middle class into the USA. Considering the decrease in US Treasuries for the past two months, I find US Government Bonds expensive across the yield curve at these levels. I think R* is well above what the Fed estimates because of factors like de-globalization, the reshoring of strategic industries, and increased protectionism. The terminal rate post-pandemic is between 3.5% and 4%, in my opinion, and that is where I think this cutting cycle will end. If I am proven right, bond investors must reprice government bond yields higher. How do we play a potential increase in inflation in a no-landing scenario? I tilted my portfolio as I outline here below: 👉Tilt the portfolio to over-weight energy and miners. 👉Have a marginal exposure to Gold and Silver. 👉Favor TIPs over US Treasuries 👉Increase allocation to US Value Stocks and International Stocks. 👉Lock-In US Investment Grade Credit at the belly of the yield curve where we can still get 4.8% to 5% yields, especially on issues at the Single-A Rating Enjoy the ride! #Finance #InterestRates #Economy #Investing

Payments have evolved from paper and plastic to APIs and orchestration - giving rise to a new breed of players that simplify the complexity and connect the dots behind the scenes. Here's how we got here. 𝟭. 𝗜𝗻 𝘁𝗵𝗲 𝗽𝗿𝗲-𝟭𝟵𝟵𝟬𝘀 𝗲𝗿𝗮, banks owned the entire payments value chain -acquiring, processing, settlement. Merchant onboarding was complex, and domestic clearing systems ruled. 𝟮. 𝗧𝗵𝗲 𝗿𝗶𝘀𝗲 𝗼𝗳 𝗲-𝗰𝗼𝗺𝗺𝗲𝗿𝗰𝗲 in the late 1990s changed everything. Players like PayPal and Authorize made online payments possible, while banks began exiting the acquiring space or partnering with processors to keep up with demand. 𝟯. 𝗕𝗲𝘁𝘄𝗲𝗲𝗻 𝟮𝟬𝟬𝟬 𝗮𝗻𝗱 𝟮𝟬𝟭𝟬, specialized gateways and regional wallets began to scale, offering merchants greater flexibility and control. The launch of SEPA in Europe marked a push toward payment harmonization, while non-bank players started building infrastructure that bypassed traditional acquiring models altogether. 𝟰. 𝗧𝗵𝗲 𝘀𝗵𝗶𝗳𝘁 𝘁𝗼 𝗔𝗣𝗜-𝗱𝗿𝗶𝘃𝗲𝗻 𝗶𝗻𝗳𝗿𝗮𝘀𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲 transformed payments from siloed systems into modular, developer-friendly tools. Merchant onboarding became faster, integrations simpler, and innovation more scalable. Open Banking regulations enabled direct access to bank data, while new credit models redefined consumer behavior. Payments evolved into a flexible, programmable layer of the digital economy. 𝟱. 𝗧𝗼𝗱𝗮𝘆, we’re in the age of seamless integration. Payments are embedded in everything - from ride-hailing apps to SuperApps. Real-time rails like SEPA Instant, UPI and PIX are live. CBDCs are in pilot. However, as payment ecosystems grow more fragmented - with new methods, regional schemes, compliance layers, and fraud risks -complexity has become a major bottleneck for merchants, fintechs, and even banks. Integrating multiple providers, maintaining uptime across systems, and ensuring regulatory compliance isn't just costly - it's unsustainable without the right foundation. This is where a new breed of infrastructure players like 𝗔𝗸𝘂𝗿𝗮𝘁𝗲𝗰𝗼 fit in - offering the tools to simplify complexity and still retain control. • 𝗪𝗵𝗶𝘁𝗲-𝗹𝗮𝗯𝗲𝗹 𝗽𝗮𝘆𝗺𝗲𝗻𝘁 𝗴𝗮𝘁𝗲𝘄𝗮𝘆𝘀 let banks, PSPs, and fintechs launch their own branded platforms fast - without building from scratch. • 𝗣𝗮𝘆𝗺𝗲𝗻𝘁 𝗼𝗿𝗰𝗵𝗲𝘀𝘁𝗿𝗮𝘁𝗶𝗼𝗻 enables merchants to route transactions dynamically across multiple acquirers, reducing costs and failed payments while improving UX. • 𝗕𝗮𝗻𝗸𝘀 can embed API-driven acquiring services into their offerings without the burden of a full-scale tech overhaul. In a world where growth brings fragmentation, the real challenge isn’t enabling payments - it’s managing them. The advantage will lie with infrastructure that can unify complexity, adapt in real time, and scale across borders without adding friction. Opinions: my own, Graphic source: Akurateco Payment Hub Subscribe to my newsletter: https://lnkd.in/dkqhnxdg

Are interest rates where they should be? Our latest analysis explores the equilibrium level of interest rates, the point where rates naturally settle over time and how today’s rates compare, despite recent global shocks. Key takeaways: ▪️ The federal funds rate is currently above equilibrium, with trade policy uncertainty playing a big role. ▪️ Mortgage rates remain elevated due to bond market volatility and increased investor risk. ▪️ Corporate bond yields are lower than expected, suggesting investors are underestimating credit risk. ▪️ Long-term Treasury yields are near their equilibrium but sit in a fragile market facing political and fiscal headwinds. Even after a global pandemic, war, and economic disruption, interest rates aren’t far off track but risks remain. Read the full report to explore our framework and forecasts: https://lnkd.in/ehuN5D9N Cristian deRitis, Damien Moore, Martin Wurm #interestrates #fundsrate #EquilibriumRate

Balance of risk shifted from inflation to labour market, according to both the Fed and markets. Consensus has #cpi next week at 0.2% mom core and headline, supporting our and markets’ expectation for #Fed cuts to start this month. BUT taking a step back —— ➡️ Similar to the ecb the Fed would be cutting with inflation still above target. In this new regime of supply constraints #tradeoffs (between inflation and growth) facing central banks have demonstrably become tougher. ➡️ Less talked about in market narrative from NFP is average hourly earnings actually ticked up to 3.8% on a 3m annualized basis, a pace too quick for inflation to settle at Fed’s target - it may not have immediate bearing but over time either #wage will have to slow or services inflation will rebound.

We’ve updated our #rate forecasts post-election, based on three main assumptions: 1) The #Fed will continue cutting rates, but may proceed more cautiously and maintain some optionality along the way; 2) The economy will continue to grow around trend near term; 3) A Republican sweep raises the prospects of fiscal expansion, which increases growth and inflation expectations. We still believe the direction of travel for interest rates is lower as any policy changes will likely take time to be finalized and implemented, the labor market continues to loosen, and the terminal rate has already repriced higher. But we now see the 10-year US Treasury yield trending towards 4% by June 2025, up from our previous forecast of 3.5%. Read more below.

📈 “This is a great time to buy.” A simple sentence — unless it’s posted by the President of the United States just three hours before announcing a tariff suspension that sends markets soaring. 🤨 As a compliance officer, this raises more than a few eyebrows. Timing matters. Transparency matters. And market integrity matters. When public statements have the power to move markets — especially when made ahead of market-moving decisions — we cross into dangerous territory. This feels alarmingly close to market manipulation, or at the very least, a troubling lapse in judgement regarding fair disclosure. Regulated professionals are held to high standards for a reason. Shouldn’t public officials — especially those with insider access — be held to the same? #Compliance #MarketIntegrity #Governance #Ethics #Leadership #MarketManipulation #Legal #Banks #Insurance #emi

Watch credit card payment in 1980s. Click-clack imprinter. Metal merchant plate. Raised card numbers. Carbon paper form. Slide mechanism over. Physical impression made. One transaction: 3-5 minutes. Your card details on paper. Multiple copies. Merchant keeps one. You keep one. Stored in drawers. This was "secure payment infrastructure." Most of the world lived through this. Manual imprinters. Carbon copies. Phone authorizations. The evolution: • 1950s-1980s: Click-clack machines • 1980s-2000s: Magnetic stripe, electronic terminals • 2000s-2015: Chip cards, EMV standards • 2015-2020: Contactless, NFC 2020+: QR codes, mobile wallets Each generation built on what existed before. Some countries migrated layer by layer. Each transition constrained by protecting previous investment. Others leapfrogged. Built QR-based systems without being bound by card rails. Germany still prefers cash because decades of infrastructure created habits. China built Alipay and WeChat Pay on QR codes when card penetration was low. India built UPI the same way. QR codes. Mobile-first. Instant settlement. Different starting points. Same insight: design for what payments should be, not what they used to be. Which brings me to yesterday. I posted about cashless payments not working at India's AI Impact Summit. Mixed reactions. Dr. Martha Boeckenfeld reminded me Germany still runs on 50% cash. Others pointed out how far India has come. They're right. Yesterday's failure stung because we've come so far we expect it everywhere now. From click-clack taking 5 minutes to QR code taking 5 seconds. That expectation? That's actually privilege. We forget payments used to sound like this. And forgetting how far we've come is progress. Did you ever make a payment using one of these? What do you remember about it? Or are you young enough to have never seen one?