Fed Preview

The next FOMC announcement is due Wednesday. Expect no surprises.

Chairman Powell has emphasized the Fed’s data dependence, telling us that if the data call for it, it will tighten policy further. But this falls squarely in the “what they say” column. The Fed says its top priority is getting inflation back down in the 2% range, but that is subordinate to mollycoddling financial markets. When it comes to “what they do”, the pattern is clear. Nothing that it hasn’t already telegraphed well in advance.

If inflation truly were the priority it portrays, it would surprise markets and tighten next week. The recent data are clear … progress on taming final inflation has ground to a halt. No … worse than that … it has gone into reverse. As Finster highlighted in CPI Spikes, official final inflation, according to both the CPI and PPI, has turned higher. PCE is not painting a rosier picture. This followed the canary in the inflation mine, asset prices, having done so late last year. As if any further confirmation were needed, we’ve also seen more timely evidence in Crude Bubbling Up. The Fed is once again in denial … to heck with the data.

None of this is to suggest the Fed should hike rates. As we’ve argued before, rates may well be high enough. It’s the paint drying in the background that needs to be brought front and center … the balance sheet. It’s still obese with MBS that the Fed had no business buying in the first place. Anything that is not a purely neutral monetary asset such as Treasuries and gold plays favorites with sectors and is an incursion into fiscal policy, the exclusive domain of elected representatives.

As we’ve also previously covered, interest rate targeting has been at least partially neutered by the practice of paying interest on reserves, and the analogous activity in reverse repos. Unlike the practices of yesteryear, in the QE era the Fed supports its rate target by creating money and injecting it into the financial system. It hasn’t deigned to explain how this is monetarily restrictive. This offsets the tightening effect of reducing money supply via asset sales.

The result is not only inflating asset and consumer prices, but increasing labor unrest as highlighted in the growing number of high profile strikes. The monetary conveyor belt shuttling wealth uphill and widening the gap between haves and have nots is fraying badly.

So much for what the Fed should do. What will it do? Talk tough. Anything else would violate its responsibilities to Wall Street.