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For Fed, What Happens Today More Important Than Monday’s Mayhem

For Fed, What Happens Today More Important Than Monday’s Mayhem

It was clear from the get-go that Monday would be mayhem for the markets – and as it turned out, it proved a lot more than that, with two-year Treasury yields collapsing the most in decades.

At stake was not just the integrity of the financial system, but also the availability of liquidity.

Bloomberg cross-asset strategist, Ven Ram, notes that as of the start of the European morning, the markets appear a lot calmer, with Treasury yields having barely moved, the dollar attempting to claw some way back and stock futures a lot less jittery.

Shortly, we get the readout on inflation for February, with the median estimates for on-month and on-year numbers forecast to show a deceleration.

There are two ways this could play out from the Fed’s perspective.

Scenario I:

The tumult in the markets continues, centered on concerns about the soundness of other regional US banks, liquidity ebbs – as it always does when the markets need it the most!

In such a scenario, what happens with the February inflation prints becomes a sideshow.

In other words, even a surprise, higher-than-forecast print won’t bother the Fed much.

After all, inflation is a pre-existing problem – and the Fed has time to battle this

Scenario II:

If the market jitters calm down, the inflation numbers – together with last week’s payroll data and upcoming retail-sales data – will take regain their predominance.

Even so, the chance of the Fed raising rates by 50 basis points is pretty much zilch.

Calming the markets about the prospect of a systemic crisis towers head and shoulders over inflation fighting from the Fed’s perspective.

After all, when a patient suffering a chronic condition meets with an accident, you treat the patient for life-threatening injuries first.

The long-stay illness isn’t the priority of the hour, as every good doctor knows.

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