The Fed Announces
The Federal Open Market Committee announcement:
CME futures were baking in ~97% odds of a quarter point cut, and we know the Fed’s statutory mandate is to placate markets. To heck with the data. The bond market has been hiking rates since the Fed started cutting. So much for the markets.
This announcement is really just about the Fed’s plans for the future. Media will parse every word from the announcement and press conference to suss out what the Fed will do in the next few meetings, and the Fed’s “forward guidance” fixation encourages it. But that’s a quixotic quest. On one hand, the Fed could decide now what to do for the next few months and ignore the data. On the other, it could follow the data wherever it leads. It can’t do both. The Fed regularly can’t predict its own actions, let alone the data … just a couple years ago it swore it would stay the course until inflation was quelled.
I ignore the speculation and so should you. Instead watch the bond market. Wherever the Fed is going, the bond market gets there first.
Markets have been registering higher inflation for several quarters now, and now it’s becoming obvious in even the lagging goods, services and wages data. We’re at a fork in the road. Either asset price inflation reverses or consumer price inflation accelerates.
Monetary policy couldn’t be simpler … tighten until asset price inflation yields. This Fed is on the wrong track. I am herewith tossing my hat into the ring for next Fed Chair. I could do a better job comatose. Heck, this Fed would have to wake up just to get to comatose.
They cut………………but signal they not keen to do so again
It’s still very soon after the announcement, and the press conference still lies ahead. But the early returns from the markets indicate they’re interpreting this as a virtual hike. The projections indicate fewer planned cuts for next year than previously projected.
Which begs the question, if the prior projections were wrong, why should we trust the new ones?
By the time those cuts would be due, the Fed may well be talking about hiking. See the bond market.
Worse still, moving policy from the realm of present reality to future speculation means the Fed’s actual policy must be always late. As if following lagging data didn’t already leave it far enough behind the curve.
The press conference is now complete and the market selloff has deepened. The Fed cut and is still projecting more for next year (see the statement of projections accompanying the statement). Color me skeptical … it’s still early.
So the bond market had it right all along and the Fed is playing catch up. The Fed remains in the hold of its head-in-the-sand easing rhetoric but is being dragged kicking and screaming in the opposite direction. What was to be a full easing cycle has now morphed into a shallow cycle which itself may yet prove to be already over. Its opening salvo of -50 bp in September is already an embarrassment and yet it cut again and again today. Markets see the inflation, realize the rate cuts are off sides and are according the Fed no credibility.
Bitcoin down 5%
Gold down 2%
£ down 1.5%
Just about everything down … US stocks, XS stocks, bonds, commodities (oil, copper, gold, silver, platinum), other currencies … in terms of US dollars … another way of saying the US dollar was up.
So it’s a good day for inflation. (Maybe not so good if you owned everything but dollars.) Not to count chickens too soon though … we could see a sharp bounce next week if not tomorrow. Only if markets don’t soon reverse higher can we expect to see relief in lagging goods, services and wage inflation in the coming months.
I have no hi-def crystal ball, but my guess is we do get a bounce near term, but not likely to exceed earlier highs before a more meaningful bear market.
If history and reason have anything to say about it, this pattern of the Fed gradually retreating from its errant rate cut agenda has a ways to play out. Pass through from asset prices to consumer prices takes time, so the lagged effects of inflation earlier registered in asset prices are still in the pipeline and should keep the Fed humble for a while and asset markets under pressure.
Investing on Fed talk is always a mistake, but people do it anyway. The market gains of the past year or so are an example of the infamous trend whose premise is false and much of which would have to be given back for progress on consumer inflation to stick. We could find that all the static about Fed easing for the past year was just a big giant head fake.
In the past, it was said that the Fed needed to raise rates so that there would be room in the future to cut rates when some sort of economic stimulus is required. Perhaps the Fed is now unnecessarily cutting rates so that there will be room to raise rates in the future when already high inflation becomes dangerously high inflation. 🙂 Yes, I am being sarcastic.
On a serious note, I am wondering how much of this rate cutting is some sort of desperate attempt to somewhat surreptitiously rescue the overextended commercial real estate sector and, to a lesser extent, the multifamily residential sector.
The only way I can see a nice, “successful” way out of the current mess is for the Trump administration to enact policies that enable fairly substantial wage gains on the part of lower class, lower middle class, and middle middle class workers while bleeding out and maybe even euthanizing the rentiers and quasi-rentiers all while forcefully keeping inflation in check.
Haha classic first paragraph! We may never know the true motive behind these insane rate cuts because the Fed doesn’t tell us the truth, but sure, the precarious commercial real estate market could be part of it. Other candidates include a misguided attempt to lower Treasury borrowing costs (if so, it’s backfired badly) and to steepen a long inverted and still shallow yield curve. And to please its easy-money-loving Wall Street constituency by inflating stock prices.
In other words, the Fed may be trying to do everything but mind its real business – the thing it has direct control over, the value of the security it issues – the Federal Reserve Note. Had it focused on this one thing the past couple decades the whole economic picture would be much better and it wouldn’t be in the pickle it is right now.
Renouncing its failed forward guidance fetish couldn’t hurt either. We got along without it just fine until Greenspan touted it under the guise of “transparency”, and it’s been all downhill since. Just tell us what you did and otherwise STFU.
Finally, give the 2% “inflation” target everything it deserves and flush it down the nearest porcelain receptacle. The correct amount of economic fraud is 0. In the absence of inflation, wages are stable while consumer prices decline as technological advance brings falling real costs of production.
At a mere 0% inflation–not CPI, PPI, or PCE inflation but inflation based upon a basket of commodities as during the American Revolutionary War–I think most of the rentiers would be utterly wiped out. American business would be quite a bit more “competitive,” to use the rentiers’ economists’ own terminology, without “needing” endless waves of foreign workers both legal and illegal.
The Federal Reserve was so hellbent on reflating the housing bubble of the 2000s–ignoring the creation of bubbles everywhere else while waiting for the real estate bubble to reflate–that even today’s negative real interest rates have the commercial real estate sector on the verge of collapse along with a fair amount of turmoil in multi-family housing.
I think this is it. In the coming years, the Federal Reserve will have to choose between saving the leveraged real estate “investors” or continue lowering interest rates much further in an accelerating inflation environment.
Outside of proper economic growth which is possible but exceptionally difficult with an utterly corrupt Congress, the only other solution I can see is the Federal Reserve essentially buying commercial office buildings and apartment complexes. It’ll be like the outrageous Silicon Valley Bank bailout except for companies such as Starwood and Blackstone.
One other solution just came to mind. If the leveraged institutional investors can find enough retail investors to foolishly buy their pigs in pokes, all will be well. The institutional investors break even or maybe even make a profit while the retail investors are left to twist in the wind as the Fed is then free to raise interest rates to try to break the back of inflation.
The Fed needs to focus more on money supply, especially the size of its balance sheet. It’s not clear rates work the same way they used to. Pre-QE, it was a so-called “scarce reserves” system. The Fed’s target rate was supported from below by making bank reserves scarce so that banks would bid up the rate to access them.
Since the advent of massive Fed balance sheets, its become an “abundant reserves” system. In order to support its rate target from below, it had to offer banks interest on excess reserves. Otherwise the abundance of reserves would allow the interbank rate to fall without limit.
The gist of it is that the Fed now actually pays banks money to stash their reserves at the Fed instead of lending them out. Putting more money into the system to keep rates up may not have quite the same tightening effect as making money scarce to keep rates up!
This may help explain the disconnect between the Fed’s insistence that its policy has been tight and the financial evidence that it hasn’t been. The Fed likes to pretend that all that matters is rate policy, but stocks and commodities tacking on 20%+ gains over the past year or so doesn’t exactly square with tight money…
Far as inflation targeting goes, my vote (all the way back to the iTulip days) has gone to human time as the ultimate standard of value. The things-focused paradigm of consumer prices is deeply flawed. A buggy whip doesn’t have the same intrinsic value in 2024 as it did in 1924. Nor would an iPhone have the same intrinsic value in 1924 as in 2024.
Absurd, no? But it highlights the inherent invalidity of using things as a measure of value, the premise upon which consumer price measures of inflation rest.
Human time, on the other hand, is something that everyone has the same amount of every year, this year, a hundred years ago, a thousand. How we spend this fixed resource is our ultimate expression of how we value the things we do with it, the fundamental invariant of value.
The CPI wasn’t even intended to be a measure of “inflation”. It likely became popular with financial system economists because it favors lower “inflation” readings than human time would. Technological advance makes things less costly in real terms over time, so things-based measures allow inflation to be produced even without consumer prices rising at all. Greenspan was an especially big promoter of the notion that “productivity” was holding down inflation while he went about his bubble blowing business … and human time would have cut him no “productivity” slack.
This logic supports rules of thumb like setting the quantity of money proportional to population and related strategies. Issues such as the fact that there are multiple forms of money in the world complicate its application in practice, but the principle is peerless.
“bleeding out and maybe even euthanizing the rentiers and quasi-rentiers all while forcefully keeping inflation in check.”
Sounds like a plan!
Mike
https://www.zerohedge.com/market-recaps/trump-dump-markets-plunge-post-election-powell-unexpectedly-turns-ultra-hawkish
As if the Fed weren’t enough … frustrating news from the legislative sausage machine as well:
https://www.zerohedge.com/political/pork-city-johnson-tries-ram-through-insane-funding-package
https://www.youtube.com/watch?v=xxVsS9ZNUOU
Having written on several occasions on the inversion of the treasury yield curve inversion, most recently in Treasury Yield Curve Uninverts, I think it timely to point out that the yield curve, as measured by the 1-10 year pair, is solidly positive. Yesterday the 1 year yield was 4.30% and the ten year 4.50%.
Among the potentially actionable implications is a bear market in stocks. By itself, this week’s crash might not be especially noteworthy, but in the context of the evolution of the yield curve, it could turn out to be the opening salvo of a bear market.
As also noted on numerous occasions, the media’s bullish interpretation of Fed rate cuts is more than a little propaganda. The Fed cut rates all through the last two major bear markets in 2000-2002 & 2007-2009, during both of which stock prices were about cut in half.
No such forecast is ever certain, but it could be broader than stocks, possibly a bull market in dollars, ie a deflationary event. If this were to turn out to be the case, an overweight in cash and short term treasuries would be prudent.