FOMC 2024 0501

For several consecutive meetings, the Federal Open Market Committee has done nothing of substance. Its Fed funds target rate remains 5.25%%-5.50%. This meeting brought a reduction in the pace of the balance sheet rolloff, a concession to the financial elite at the expense of average Americans beset by inflation.

FOMC 20240501

For months it’s been increasingly clear that the Fed’s proclaimed resolve in bringing inflation down has been upstaged by a growing urge to ease monetary policy. The result that progress on reducing inflation has stalled and shifted into reverse was, as I’ve been saying for just as long, inevitable.

The Wall Street dominated financial media has practically twisted itself into pretzels lobbying the Fed for just this. Its professed concern over a rise in unemployment – with jobs at all time highs – is a transparent cover for its real agenda to inflate stock prices … something in the long run not possible without inflating consumer prices.

As far as rate policy goes, 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 actual 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.

14 thoughts on “FOMC 2024 0501

  1. Finster says:

    Practically Powell’s first words in the press conference were to reassure listeners that Priority #1 is to reduce the inflation that burdens millions of Americans. Those words ring increasingly hollow. Powell Inc had a chance to finish the job and decided to put the financial industry first.

    Based on the first five minutes, this is a solid F performance.

    Regardless of policy, I want to hear someone in his position tell the truth for a change. Just tell us that inflating stock prices is more important to you than not inflating consumer prices. Wall Street is more important than Main Street. The welfare of the financial and political elite is Job #1. Yes, you’ll lose your job, but at least the system will have a fighting chance at recovery.

  2. Finster says:

    Powell was just asked if he thinks a period of tighter “financial conditions” would help to get inflation back on track. His response was another gift to Wall Street; “We can’t really know that …”, a connection he had no problem making a scant twenty months earlier. It had its intended effect, though; stock prices went vertical.

    Powell keeps telling us that the policy proposition is “difficult”. No it’s not. If you honestly want to bring down inflation, it’s child’s play.

    Contrary to the advertising, this is a Fed that would have to be dragged kicking and screaming into dialing down inflation.

    This entire press conference is an exercise in prevarication and obfuscation. Disappointing but not surprising … a resolutely dovish Powell assuring us he is dedicated to getting inflation back down while trying to justify the most inflationary possible policy. If I were President I would be threatening to fire him. “You had your precious ‘independence’ and blew it!”

    Of course nobody like me would ever get the establishment support to be put in that position. The only more elusive post on the planet would Chairman of the Federal Reserve.

    But I might get elected President of Argentina…

  3. jk says:

    they’re really afraid of losing control of the long end of the curve. if long rates go to 5%, let alone my target of 6% [or higher], the equity market is cooked. if the fed slows the tapering of long-dated paper and janet keeps pumping bills, the result is essentially operation twist.

    1. Finster says:

      In which case Powell fails the sanity test. The Fed, with the enthusiastic cooperation of the popular financial media, has been flogging the rate cut story for months while the Treasury market has been hiking rates. Keeping doing the same thing over again expecting different results?

      Long end rates sometimes follow short and sometimes they don’t. Lately they’ve been dealing not only with staggering supply but also with resurgent inflation worries. The less worried the Fed is about inflation the more the market has to be. If its intent has been to buttress the long end it’s failed miserably.

    2. Finster says:

      FWIW your 6% target is only a matter of time. I still think rates could tumble in reaction to a surge in unemployment at some point, but that would be the last hurrah. Deficits are already verging on runaway status, and that’s at full employment. Imagine what fiscal “stimulus” would do.

      The only other option is massive Fed Treasury buying a la Japanbabwe (sorry no simpering euphemisms here).

      Rock meets hard place. The only way inflation abates is if either federal borrowing retreats or private borrowing does. The right stuff kind of leadership to accept either of those outcomes being nowhere in sight, the alternative of crushing inflation is all that’s left.

  4. jk says:

    they reduced monthly qt from $65b to $25b. if they only roll off short to medium duration paper they’ll be essentially supporting the long end relative to their prior behavior. imo eventually they’ll be back at straight qe, but this move lets them extend and pretend a while longer. in the meantime banks might be blessed by not having to have any capital at all backing treasury paper holdings, and that will help soak up more of the issuance.

    1. Finster says:

      For sure, a whole lotta pretending going on. That’s practically a rounding error in the context of total UST supply.

      There are two separate issues. One is the actual objective policy and the other is the rhetoric.

      The bigger policy problem is in the past. Most analysis blames the current setup on the fiscal side, but fails to recognize the role that Fed policy played in it. Low rates incentivize borrowing. Politicians are no different than anybody else … the current dire fiscal setup owes a lot to a decade and a half of ultralow rate policy. Make borrowing look next to free and of course you’re going to get a lot of it. Now Fed policy has to exert at least some pressure in the opposite direction while coping with the Frankenstein monster it brought into existence.

      Rates are probably close enough for government work. Far as quantitative policy goes, we’re headed for at least some debt monetization. You could look at the QT trimming as a step in the direction of QE, however insignificant it may be in its own right.

      The rhetoric is inexcusable. It claims concern for inflation-besieged ordinary Americans. The story is they’re going to end up with the same size balance sheet, just taking longer to get there. If you can’t tell the truth about what you’re doing, you must be doing something wrong.

      This is a Fed that isn’t even acting in its own interests. Its independence is under threat. If it wants anyone to defend it it’s going to have to show a benefit from it. Not to mention where is it going to be if it continually inflicts harm on anyone holding Federal Reserve Notes…

  5. jk says:

    i think the fed’s “independence” is a sometime thing. the fed-treasury accord of 1951 established some separation between those 2 entities. prior, during and after ww 2, the fed was sworn to yield curve control and the treasury ran the show. i think that we’re headed back to that, whether explicitly or implicitly. we are ever more in an era of fiscal dominance. the fed’s reduction in its monthly qt is, relative to recent history, supportive for the treasury market. step by step….

    1. Finster says:

      No doubt you’ve heard talk about Trump supposedly wanting to assert control over monetary policy. I haven’t heard it from his mouth, and he has a notorious tendency to rhetorical bluster anyway, but his public relationship with the Fed during his last term gives it a certain patina of credibility. The only defense the Fed has is its ostensible independence. What happened decades ago couldn’t be less relevant … except possibly to bolster Trump’s argument.

      Not that that’s the only threat. Going by its behavior over the past few months you could make a case that Janet Yellen is pulling the strings. Not to mention that Wall Street has been there from the beginning, and that its influence has only grown at least since the Greenspan era.

      The Fed is going to need some public support if it’s to remain viable. If it Argentinas America, it could be laying out the welcome mat for a Javier Milei to come along and sweep it from existence. It’s hard not to see it as not only being dishonest, but also just not that bright.

  6. jk says:

    from herb greenberg:

    ‘I worry what’s going to happen in 2025’
    When this seasoned banking analyst talks…
    Herb Greenberg
    May 4

    When a seasoned banking analyst like Charlie Peabody of Portales Partners (and a incoming partner at Wall Street Beats) speaks, the inner circle listens – and everybody else should, too.

    He’s speaking to us about the impact of yield curve control, which could be a short term fix for a longer term problem. Or as he puts it…

    I really worry what’s going to happen in 2025…there will be a price to pay.

    For more context, as he explained on his Beats Roundtable debut, he explains… First, Powell announced the tapering of Quantitative Tightening (QT),

    Secondly, the Treasury is continuing with its heavy T-bill issuance

    Third, Treasury announced the maturity structure (and mix) of its financing needs, with no increased issuance at the long end of the yield curve

    Fourth, Treasury announced the commencement of a Treasury buyback program

    Finally, Treasury is working with the Treasury Borrowing Advisory Committee (TBAC) to create new (deficit) financing products

    The bottom line, Charlie says, is that between the tapering of QT, the financing of the growing deficit via the belly of the curve, the increased issuance of T-Bills, and the new buyback program, the Treasury and Fed are looking to have a greater influence on the longer end of the yield. In short, we believe that the U.S. government is embarking on a shadow form of yield curve control.

    Forwarded this email? Subscribe here for more
    ‘I worry what’s going to happen in 2025’
    When this seasoned banking analyst talks…
    Herb Greenberg
    May 4

    READ IN APP

    When a seasoned banking analyst like Charlie Peabody of Portales Partners (and a incoming partner at Wall Street Beats) speaks, the inner circle listens – and everybody else should, too.

    He’s speaking to us about the impact of yield curve control, which could be a short term fix for a longer term problem. Or as he puts it…

    I really worry what’s going to happen in 2025…there will be a price to pay.

    For more context, he explains…

    First, Powell announced the tapering of Quantitative Tightening (QT),

    Secondly, the Treasury is continuing with its heavy T-bill issuance

    Third, Treasury announced the maturity structure (and mix) of its financing needs, with no increased issuance at the long end of the yield curve

    Fourth, Treasury announced the commencement of a Treasury buyback program

    Finally, Treasury is working with the Treasury Borrowing Advisory Committee (TBAC) to create new (deficit) financing products

    The bottom line, Charlie says, is that between the tapering of QT, the financing of the growing deficit via the belly of the curve, the increased issuance of T-Bills, and the new buyback program, the Treasury and Fed are looking to have a greater influence on the longer end of the yield. In short, we believe that the U.S. government is embarking on a shadow form of yield curve control.

    He adds…

    Containing long term rates improves financial conditions, supports rate sensitive industries (such as housing) and aids PE expansion (or prevents PE contraction). In short, unless we get a blowout jobs number, or material wage inflation or much higher energy prices, the Treasury/Fed partnership may prove successful in limiting the upward pressure on long term rates.

    He adds…

    That bodes well for financial assets in the short run.

    1. Finster says:

      The term “yield curve control” of course being the simpering euphemism for debt monetization alluded to earlier. You can tell its purveyors are embarrassed by it just by their avoidance of frank language.

      The jargon also makes it sound like there’s more to it than there is. The bottom line is simple. Issuing more Treasury bonds means their value will fall. And there’s two ways the value of the bonds can fall … their price can fall or the pricing unit can fall, or some combination of both.

      So to the extent the Fed and Treasury succeed in limiting the upside in rates, we have dollar debasement, ie inflation.

  7. jk says:

    i think “yield curve control” has a specific meaning of its own, and points to one method of supporting inflation. it lowers the value of bonds but specifically by crushing the numeraire while maintaining nominal values. yes, it’s inflation, but in the service of lowering the debt to gdp ratio. [given both of those quantities are nominal]
    .
    the alternative would just monetize the deficit, but allow long bond yields to rise along with inflation. the higher treasury yields would amplify the growth of debt and so not lower the debt:gdp ratio.
    .
    inflation with ycc steals from lenders more efficiently than inflation alone. regulations forcing various institutions to hold bonds determines whose ox is gored. and don’t forget all those foreign cb’s holding treasuries – their holdings can be reduced in value immediately by higher rates, but more subtly reduced over time when they roll their paper at capped yields.
    .
    ycc was used in the u.s. during and after ww 2 and succeeded in lowering the relative value of the huge deficits which financed the war.

    1. Finster says:

      Rate repression has been stealing from lenders-savers for years and same 1% benefits no matter how clever the scheme. No … because of how clever the scheme. Look at what happened in 2020 when the Fed bought more bonds than ever and long rates hit their all time lows.

      YCC is no different. It involves buying bonds with printed money to achieve a targeted yield. It’s like QE except in QE the quantity of dollars fixed and the rate left open; in YCC the rate is targeted and the money creation is unlimited; whatever it takes to get to the yield target. If anything it benefits lenders. It lowers long rates and bond prices go up.

      You may recall I’ve long defended QE as less damaging than rate policy because it allows price signaling to work. YCC is just all the liabilities of QE without the benefits.

      Sure the value of the dollars goes down, but all methods of inflation do that. And by then bond holders have sold their bonds and locked in their profits.

      Moreover it overlooks the effect lower rates have on borrowing behavior. In lieu of higher direct taxes, politicians borrow more. This means less targeted taking, not more.

      The financial elite have hardly concocted a scheme to secretly distribute their wealth back to the have nots. If it were on the up-and-up, politicians would be out in front of the lights and cameras rushing to take credit for it, not hiding it behind jargon understood by 0.1% of the public.

      Would be home buyers find their purchasing power has been disappearing. And increasing numbers are even finding cheap fast food unaffordable. Even some Fed insiders have been critical.

      Every unit of purchasing power the government spends comes from somewhere. If it’s not taken in the form of direct taxes, it’s taken by covert means. We can quibble whether it’s theft, robbery, burglary, embezzlement, or yield curve control, but the big picture is the same either way.

      1. Finster says:

        For the record, my core point isn’t just about the policy itself; it’s about the dissembling. They’re ashamed of what they’re doing, or they would be up front about it.

        There are plenty of more attractive policy options. Cutting wasteful spending is an obvious one. Reversing the TCJA corporate tax cuts is another. Far as the Fed goes, easier money just acts as an enabler. It encouraged the excess on the way up, it can discourage it on the way down. And if it seeks lower long term rates, it can get them by standing firm on inflation. The more worried the Fed is about inflation, the less the markets have to be.

        This is a group that tells us it wants to get (consumer) inflation down to 2%, but that that last mile hard is hard and is going to take a while. That’s just not credible. It could have had it there already but instead chose to levitate stock prices.

        Then there are also the Fed’s irrational articles of faith that it follows but doesn’t bother to justify. The Fed got along just fine for decades without trying to tell the markets in advance what it plans to do, and being embarrassingly wrong about it most of the time. And where is it written that Fed funds can only move in long, unidirectional series? Why can’t it be tweaked here and there as data evolve? There are clear disadvantages to the former, just one being that the Fed has to anticipate a whole series of hikes or cuts before it can move at all. On top of the delays already baked in from following lagging data like consumer prices and unemployment, it leaves the Fed even further behind the curve. Since no rationale has been articulated, the only plausible conclusions are that they’re bound to a hidden agenda, basing policy on superstition, or they’re just not that bright.

        It should be stripped of its power to target and manipulate interest rates, and under no circumstances should be permitted to target bond yields. It can conduct monetary policy quantitatively, but should also be subject to limits on the amount of money it can create and should be confined to buying and selling only Treasury debt and gold.

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