For several consecutive meetings, the Federal Open Market Committee has done nothing of substance. Its Fed funds target rate remains 5.25%%-5.50%. The balance sheet rolloff continues apace.
It’s been all talk and speculation about what it might do later. Financology’s position is look not at what they say, but at what they do.
And if you’re looking for meaningful insight into your investments, don’t even do that …look instead at what the bond market does. Regard the Fed as you might a comedy act, for amusement and criticism only.
All while the Fed has been doing nothing but talking and speculating, with the media hanging on every word, the bond market has been conducting interest rate policy. It began to cut rates in late October. In late December it began to hike, and has been hiking ever since. The schism between the rate cut talk and actual bond market rate hikes is where it gets interesting.
So the Wall Street media have been seized with a narrative over the simplistic question of when will the Fed will start cutting rates, presuming that cutting is its only option. This isn’t accidental; Wall Street makes money selling stocks and the rate cut tease has been very profitable. Not only that, but it also knows the Fed likes to tip its plans so that its policy actions come as no surprise. Wall Street has discovered it can take advantage of the Fed’s fondness for fulfilling expectations and pressure the Fed for what it wants by manipulating the expectations.
We investors are best off keeping a detached perspective.
The upshot is that today’s event is the financial equivalent of Jerry Seinfeld’s show about nothing. We may criticize, we may laugh, even cry, but anything worth taking to the bank will be seen in the bond market. I’ll be the heckler in the back.
Market reaction to the FOMC statement has so far been subdued. But paradoxical as well. Treasury prices declined while stock prices rose. In short, the bond market incrementally further hiked rates while stocks responded as if rates were cut. Commodity prices rose as well.
Those returns are highly preliminary. The Chairman’s press conference is in progress.
Short version: Powell did not toss cold water on the glowing embers of inflation. He doused them with gasoline.
It’s at least partly a doomed-to-backfire face-saving maneuver. Denial that it was imprudent to start talking about rate cuts late last year. That talk loosed financial conditions and kited stock and commodity prices, which have already begun to filter into reaccelerating consumer price inflation. Today’s remarks sent them soaring yet higher. Amid some embarrassing internal contradictions … for example on one hand saying rate cuts later this year are effectively predestined and on the other saying they will be dependent on the data. Financial conditions which were vital to checking inflation a couple years ago now don’t matter. Powell dismissed recent hot inflation data as a “bump on the road” … conspicuously avoiding the word “transitory”.
I wouldn’t try to parse whether it’s a dumb mistake or a deliberate prioritizing of Wall Street over Main Street. But it’s at least one of those, if not both.
Be prepared for more supply chain disruptions, bad weather, fits of corporate greed…