Joint Session Overshadows FOMC Session

Trump’s address to the joint session last night, while superficially “more presidential,” was a masterpiece of identity-politics that leaves Democrats no alternatives but to double down on Clinton’s “deplorables” error, or capitulate. Market-based expected probabilities for a March FOMC rate hike have jumped to 80% on Monday and Tuesday, during which there was no market reaction at all. We are agnostic on whether that hike will really happen. It doesn’t matter anyway, because markets have become highly risk-tolerant, including tolerance to experiments by the Fed. That same risk-tolerance implies that the “natural rate of interest” is rising, so a Fed hike is appropriate, and would not represent a policy tightening at all.