FOMC 2022 0727

The Federal Open Market Committee today announced a 75 bp hike to 2.25%-2.50% in the Fed funds target. It’s solidly in line with expectations.

FOMC 2022 0727

We can always quibble.  We’d have preferred 125bp, along with a clear statement to the effect of “that’s all, folks” … “we’ll review the rate at each subsequent point and either hike, cut or hold as the data warrant at the time”. It could even ease up on the balance sheet trimming, cutting only non-Treasury securities. Of course the committee has kind of made such things difficult by conditioning the markets for years to expect only the expected. We’re still seeing excessive reliance on foolhardy forward guidance, but at least we’re also seeing concrete action, a step in the right direction.

So as a practical matter our ideal move may be a bit of a fantasy.  But as long as we’re going down that road, we have to reiterate that the best rate policy is none at all.  In contrast to many Fed critics, I don’t have much of a problem with QE, confined to Treasuries and gold, and would prefer to see it completely replace rate targeting as the Fed’s marquee policy tool.  Probably because it’s been done so long, rate targeting has become accepted as normal, but that overlooks the incalculable damage it has inflicted on the economy.

Setting interest rates, arguably the most important prices in the world, is too big of a job for one committee of people, no matter how smart they are. History proves it, and the current economic mess adds an exclamation point. Furthermore, in news that just broke this week, the Chinese government has been attempting to infiltrate the Fed. Such things are only possible through centralized power.

A simple check on progress is provided by the stock market. The recent rally in stock prices is a canary in the inflation coal mine and if it continues poses a threat to the Fed’s inflation fighting mission. A soaring stock market will require a more aggressive Fed. We have more sophisticated tools as well; FDI shows clear progress on inflation, the Fed needs to ensure it doesn’t undo it, and all indications are that it will. Get Fed funds into line with the rest of the yield curve now and stop talking about what you’re gonna do later. That’s what future FOMC meetings are for.

There are early signs of progress on that front; in particular media speculation that the Fed may be dialing back on “forward guidance”. Such speculation often precedes actual policy developments. We have been urging this for years though … maybe the Fed is reading Finster…

12 thoughts on “FOMC 2022 0727

  1. Bill Terrell says:

    Good news … in his post announcement remarks, Jay Powell confirmed that the FOMC would be making policy on a “meeting by meeting basis” and there wouldn’t be “clear guidance” on future rate moves. He did try to straddle the fence a bit with some speculation about what it might do at its next meeting in September, and tried to assure that the Fed would continue to be as “transparent” as possible, but underscored “data dependence” as the key driver of policy, and we’ll take any sign of progress we can get.

    Short of halting rate targeting altogether, ideally the Fed would adjust funds at each meeting and try to avoid long campaigns of unidirectional rate target moves, or better yet tweak Fed funds weekly, and completely cease speculating on what rates might be appropriate in the future.

  2. Bill Terrell says:

    Powell just made a less encouraging comment, suggesting that it would have made little difference if the Fed had started to hike rates “three months earlier”.

    Clueless. All it really needed to do was back off the emergency measures it put in place in March 2000 once the emergency was over. That would have meant in three to nine months … it was already abundantly obvious in soaring stock and realty prices by late 2000 that the financial aspect of the emergency had conclusively ended. That would have meant raising rates not a pathetic three months earlier, but over a year earlier. This is no mere Monday morning quarterbacking, either … we said so at the time. Come on Jay, you can do better than that.

    Our current problems can be traced at least as far back as 2011-2013, when the Fed similarly failed to remove emergency measures once the emergency was over. Destructive fiscal policy has also played a role. But the Powell Fed provided the final burst of recklessness in 2020 when it made at least two grievous errors. First, in expanding QE beyond Treasuries and into mortgages and corporate securities, and second in promising literally years of zero interest rate policy.

    Anyone doubting the foolishness of the innocent-sounding “forward guidance” need look no further.

    1. Bill Terrell says:

      Oh for sure … no matter how much they may deny it. Although IIRC in his latest press conference Powell seemed to suggest it had more credibility than in the past. It’s clearly a Fed that wants to have it both ways, on one hand being “transparent”, which has slowly morphed into telling markets what it will do in advance, and on the other being “data dependent”, making decisions based on all the available information at the time. It doesn’t want to face the inherent conflict. It will tell us both, and leave us to puzzle.

      Very much a shades of gray kind of thing … the FOMC has clearly moved in the latter direction but far from all the way.

      It appears markets will be putting it to test. The recent rally across asset classes clearly indicates real time market dollar depreciation. This is the last thing the Fed wants if consumer price inflation is to be brought under control any time soon. Either we will hear some even more hawkish Fed rhetoric soon or its credibility will suffer along with the inflation problem. Of course those of us with a memory longer than about three years have seen this Fed buckle under pressure before.

      1. Bill Terrell says:

        Well today we heard some of that “more hawkish rhetoric”. SF Fed President Mary Daly told CNBC the FOMC was “nowhere near” done hiking rates. Chicago Pres Charles Evans spoke supportively of another 75 bp in September, and even perma-dove Neel Kashkari has been emphasizing the centrality of the Fed’s inflation focus. The Fed is plainly pushing back against bullish stock price action, exercising a rare Fed call.

        Not surprisingly this took the starch out of stock prices. More surprisingly long term Treasuries sold off as well … even though a tighter Fed would seem to be more protective of the value of future dollars. In the short run though, the value of dollars in the here and now appears to have benefited most, with dollar denominated price declines across asset classes the logical reflection of an appreciated dollar.

        It’s admittedly speculative though to tie market action directly to this news, given the concurrent high profile geopolitical headlines pertaining to China-Taiwan. It’s important to acknowledge these developments especially since they amount to a joker in the SS deck … as we’ve noted in the past SS cannot factor in developments arising from outside the financial and economic sphere. Fed policy is well within this domain, but the geopolitical is not.

        I think of SS forecasts as what the markets “ought” to do in the absence of such external impulses. External impulses are never completely absent, but sometimes they are less absent than others and in such times SS forecasts merit an extra grain of salt.

        1. shiny! says:

          Stocks down yesterday, up again today. Dollar down, dollar up. Ditto oil and gold. There’s not much, if any, coherent narrative in relative movements of asset classes. I believe the technical term for this is higgledy-piggledy.

          I think investors are just just flailing. Timothy Peterson (an analyst I’ve grown to respect) said something yesterday that echos your thoughts, if I understand you correctly:

          “Looking at my watchlist and I’ve never seen such a disparity in price paths in so many asset classes.
          Translation: nobody knows what is going on.
          Also: markets are failing to price in the behavior of Russia and China.”

          1. Bill Terrell says:

            Thank you for your contribution to the Financology lexicon, Shiny! Higglededee, pigglededum … so your correspondent will no longer be at a loss for words even if he is at a loss for understanding…

            Alas no exception to your translatory conclusion here. Markets appear to be as confused as any of us. Their dictum to “don’t fight the Fed” appears to only be taken seriously on the way up. They responded to the last FOMC announcement and chairman’s press conference as if they were dovish … which triggers major cognitive dissonance in yours truly. I cannot remember, all the way back to the Volcker era, this hawkish of a Fed. Damn the torpedoes, full speed ahead, inflation is Public Enemy Number One, no mush-mouthed ambiguity. When you got not only the infamously buckling Powell but perma-doves like Kashkari talking tough, you gotta wonder … if that’s not hawkish, what would hawkish sound like?

            Add to the previously enumerated chorus Cleveland Fed President Mester singing from the same hymnal yet again today. Yes, nobody knows what’s going on, including me.

            Best guess is it’s like Wile E Coyote having run off the edge of a cliff, but yet to look down and realize it. If so, for stocks that brief triumph of the rule of psychology over the laws of physics could be mere weeks…

            1. shiny! says:

              Oil is tracking Systems quite well, but gold, instead of following commodities, is going sharply up. Do you think it’s ahead of schedule or might there be another leg down to go? Normally I’d watch the strength of the dollar, but Wiley Coyote’s in charge.

              1. Bill Terrell says:

                Yes, gold is broken out separately from other commodities because it marches to a different drummer. The others to one degree or another broadly track copper. A semiprecious metal like silver is a hybrid; its SS plot would fall between copper and gold.

                Another thing to bear in mind is that SS is not denominated in dollars, but rather relative total return. So for example if the Gold line is going up or down and the Bills plot is doing the same, that implies a roughly stable price for gold in dollars. That’s what the current chart is showing. Another example is the Stocks line pretty much holding its own so far this year. But the Bills plot rose strongly, translating into Stocks deeply underperforming Bills, which amounts to dollar-denominated prices.

                Generally the plots are all relative to each other, showing outperformance or underperformance, in recognition of the andense of an absolute standard of value.

                Strictly speaking the above SS chart shows gold remaining range bound in dollar terms through October, then decoupling from Bills to the upside … although that may be crediting SS forecasts with more precision than is justified. My SS takeaway would be broader; more like Gold and Bonds have the wind at their backs versus the alternatives over the next few quarters.

        2. Bill Terrell says:

          We noted the addition of Cleveland Fed head Mester on Thursday, and now of yet another uber-hawkish voice to the Fed choir. Saturday Fed Governor Michelle Bowman explained not only why she supported the latest 75 bp rate hike but also “that similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way”.

          Thus the Fed appears to be paving the way to make the 75 bp hikes previously characterized as super-sized the new normal. I submit that markets have far from priced in any such thing. And while as long as stock and commodity prices were falling, a case could be made that the Fed would never get that far, as long as they’re in rally mode the pressure on consumer prices remains and only makes more likely the prospect the Fed will continue to tighten aggressively until something breaks.

          This SS chart shows the decline in the USD (Bills plot) accompanying the latest market action – the exact opposite of what the Fed needs – which probably helps account for this hawkish open mouth salvo.

          SS20220806

    2. Bill Terrell says:

      JK, Fed Governor Michelle Bowman shed a little more light on that Saturday:

      “On the subject of forward guidance, I am pleased to see that following the July meeting, the FOMC ended the practice of providing specific forward guidance in our post-meeting communications. I believe that the overly specific forward guidance implemented at the December 2020 FOMC meeting requiring “substantial further progress” unnecessarily limited the Committee’s actions in beginning the removal of accommodation later in 2021. In my view, that, combined with data revisions that were directly relevant to our decision making, led to a delay in taking action to address rising inflation.”

      So she’s saying what’s changed is to eliminate specific forward guidance in post-meeting communications. She also supports my view that forward guidance hindered the Fed’s timely response to rising inflation. I would only take issue with her identification of December 2020 as when the mistake occurred … the Fed clearly went off the rails in March 2020 in promising literally years of ZIRP.

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