The Federal Open Market Committee was expected to announce nothing of substance today and it did not disappoint. Its Fed funds target rate remains 5.25%%-5.50%. The balance sheet rolloff continues apace.
Yawwwwn. To call today’s event a “decision” would be misleading … the decision was already made. It’s even a stretch to call it an “announcement” given the FOMC has already pretty much told us what it was going to announce.
The whole thing has descended into farce. The FOMC tells markets what it’s going to do, then announces it as if it were news. Financial media oblige, lapping up the soporific pablum as if it were stone tablet caliber revelation.
If it were nothing but an otherwise consequence-free matter of form, it would be laughable. But it isn’t consequence free. In order to tell markets what it’s going to do well before it does it, it has to decide what it’s going to do well before it does it. That adds a delay between decision and the action.
It’s insult to injury. It’s adding to delays already built into its policy paradigm. As we’ve discussed ad nauseum, its favorite data are lagging indicators. CPI tracks inflation through multiple delays extending from seconds to years, the bulk of them lying in the years range. Ahhh, you might say, but the FOMC prefers PCE as a measure of inflation. No matter … it’s also based in consumption prices. Worse yet, it prefers so-called “core” and more recently even “supercore” versions, which by virtue of eliminating the most rapidly responding of consumer price data, lag even more.
So it’s hardly consequence free. These delays mean the policy function is out of phase with the policy target … enough to often be pro-cyclical. That is, policy is inflationary when conditions are already inflationary and disinflationary when conditions are already disinflationary.
Much more of the former then the latter, of course.
The result is the system careens from boom to bust and back again. And the more transparent (read predictable) the Fed has become, the more extreme the booms and busts. The nineties stock bubble, the ensuing bust, the mortgage bubble, the following financial crisis, and the “everything bubble” inflated since are all cases in point.
It doesn’t have to be this way. All the Fed need do is discard an assumption it’s never bothered to justify to begin with … that asset prices are irrelevant to inflation. The Fed a priori discards them in its reckoning of inflation. The tacit notion that they live an independent existence in a parallel universe while interest rates and the real economy interact is absurd on its face. At risk of being laughed out of the room, the Fed would never say it, yet it behaves as if they do.
The only concession to the reality that asset prices are the canary in the inflation mine resides in its “financial conditions” construct, wherein said “financial conditions” are viewed as a sort of transmission channel from policy to the real economy. Yet even this vague and fuzzy indicator is only occasionally hauled off the shelf when it seems convenient. And considering how much its powerful constituency, Wall Street, loves inflation, that isn’t very often.
Its other powerful constituency, Washington, loves inflation just as much … and contributes delays of its own. Politicians are getting blamed for running up federal debt at a breakneck pace, posing an existential threat to the American economy. I’m not about to make excuses for politicians, but the Fed was the prime mover. Easy money policy “works” to “expand credit” by inducing borrowing. Politicians are hardly immune. It’s no accident that federal debt started going off the charts in the midst of a fourteen year easy money orgy of ultralow rate policy and serial printing expeditions. Monetary tightening does the opposite, but fiscal policy has built up a huge head of steam and is still behaving as if borrowing were nearly free. This is another lag between policy and response, and explains why inflation is taking so long to be brought to heel. Already resurgent asset prices indicate another inflationary impulse has entered the system.
Over the course of innumerable post-meeting press conferences, I have yet to hear the Chairman explain why the FOMC excludes asset prices from its reckoning of inflation. I can’t recall the question having even been asked. That, alas, is unlikely to change today.
I will follow up in the comments with any reaction to the much less important issues that are much more likely to come up.
Media are already busily parsing the FOMC statement for dovish and hawkish color, highlighting differences from the last statement such as replacing “additional firming” with “further adjustments” and a reference to abstaining from rate cuts until “inflation” is sustainably on track to its target.
Another big yawn. Instead of poring over fuzzy words for hints as to what the august members of the committee plan to do in the future, I prefer the hard numbers the bond market gives us.
The bond market doesn’t appear particularly impressed. On balance it sees the statement as mildly hawkish. In the initial minutes after the announcement, yields rose modestly across the maturity spectrum. This likely reflects not so much new information as the markets’ failure to bully the FOMC into an earlier cut than it wants.
After spending much of 2022 aspiring to emulate Paul Volcker, Powell is once again channeling his inner Arthur Burns. Minutes into his press conference he had already undone markets’ mildly hawkish impressions of the committee statement, with short and medium term yields even trading a bit lower than their pre-statement levels.
Subjective impressions are less than impressive. Powell appears to have no clear idea of what he wants to say, likely reflecting a lack of clarity on what he thinks. He seems unable to articulate either a hawkish or dovish point without a classic two handed economist equivocation. Viewers looking for a firm commitment to reign in inflation are left wanting. They will likely have to wait until final inflation data take a clear turn higher before anything resembling a backbone emerges from the halls of Eccles, and it’s not even clear that would be enough to do it. Yet only minutes later, yields again reversed course as he was at least able to throw cold water on Wall Street’s cherished March cut. Maybe he felt compelled to other-hand saying reducing the balance sheet runoff at that time was on the table.
Why bother? When Powell says “I don’t know”, which has occurred multiple occasions in today’s appearance, we can confidently take him at his word.
How did January’s press conference get to be about March anyway? Won’t there be a press conference in March? Sure, we would all like to know the future, but the Fed has confused “transparency” with predictability. It first tempted markets to speculate on a March cut and then didn’t like the result. Wall Street knows the Fed likes to be predictable, so has learned by merely creating expectations it can bully the Fed. Powell pushed back today, but the Fed’s own obsession with predictability put it in this position.
Powell doesn’t know and can’t know what will be appropriate in March. Could he have predicted in January 2020 what the Fed would do in March 2020?
What should he say? It’s child’s play. In March and thereafter we’ll consider all the data available at the time and decide then.
What should he think? If asset prices take another substantial leg down, either a cut in interest rates or the rate of balance sheet trimming or both is in order. If they continue heavenward, an increase in either or both is just as valid.
So what will the Fed do in March? May? … Not only do pundits not know, Jay Powell doesn’t even know. Those trying to extract that information from him are trying to squeeze the proverbial blood from a turnip.
How should we investors approach the question? Forget about it. The media circus is sound and fury signifying nothing. How did the investors seizing on every word do yesterday?
They first took yields up a bit, then down, Stocks sold off, surged, then sold off more deeply. Then by the next morning they were back up again. A lot of heat but no light.
Look instead to the yield curve. As of yesterday’s close the yields out to a year were as follows:
1 month 5.53%
2 months 5.46%
3 months 5.42%
4 months 5.40%
6 months 5.18%
12 months 4.73%
So the first month’s rate is 5.53%. The second month’s rate is 5.39% … necessary in order for the full two months to be 5.46%. And so on. In other words, short term interest rates are sloping down. It’s not speculation. It is fact. Now. This is already baked into the multi-trillion-dollar Treasury market.
Is this a perfect forecast of overnight rates? Of course not. But it does represent all that is knowable right now. Any deviations from this course will be the result of information not yet available. And that includes Jay Powell’s mind.
What’s more, these are rates the Treasury actually borrows at and you can actually invest in. Do you borrow at or invest in Fed funds?
Not to mention the bond market takes into account both fiscal and monetary policy. Better yet, the bond market leads, the Fed follows. The bond market cut rates before the Fed did, and it hiked them before the Fed did. And while media punditry debate probabilities of when the Fed will cut and how much, the bond market actually started cutting rates over three months ago. Do you base your trading on lagging indicators?
The bottom line … unless you man a Wall Street bond trading desk, you’re best off paying no attention to speculation about what the Fed will do and when. Most Fedspeak and related media punditry are a complete waste of time for traders and investors. All that matters to you will be in the bond market first.
Wow!
https://nitter.holo-mix.com/Barchart/status/1753158523121197454#m
Inflation data continue to show progress has stalled and even reversed. Let’s look at some highlights:
YOY stock price inflation: 10.2%
YOY labor price inflation: 4.5%
That’s right, the BLS reported average hourly earnings up 4.5% this morning. Markets are focused on the headline payrolls number, but this most directly reveals the rate of dollar depreciation. You can either conclude the value of an hour of human time increased 4.5% since last January, or that the value of a dollar deceased.
Nolo contendere.
But wasn’t inflation on a glide path to the Fed’s 2% utopia? What went wrong?
Monetary policy works by incentivizing or disincentivizing the assumption of debt. While the private sector has responded to more expensive borrowing by cutting back, the public sector has not. The has put a $34T barrier between the Fed and its inflation target. By itself it might not be so bad, but the Fed has been fanning the inflationary flames … not through any concrete policy action, but by talking about monetary easing.
Stupid, stupid, Fed.