The Fed Announces
The Federal Open Market Committee announcement:
The bond market announcement:
Daily Treasury Par Yield Curve Rates
Markets continue to exhibit a strong deflationary undertow. The Fed and the media that cover it are grossly in error in confusing higher oil prices with inflation. Inflation is when prices go up due to the currency losing value. These oil price increases are real, not inflationary. The dollar is actually rising in value, not only versus other currencies, but versus alternative stores of value like stocks. bonds, and commodities … pounds, euros, Treasuries, US stocks, XS stocks, copper, gold, silver, platinum … the USD is appreciating versus them all.
The Fed can do nothing about oil, but it issues the currency. All it need do is focus on that which it controls.
That the Fed is off sides is further underscored by the fact that at this time in 2008, as oil prices were approaching an all time high of $147 a barrel, the Fed was cutting rates. Why it should have then and not now is a mystery, assuming it is objectively following the data. Though I’ve staunchly opposed every rate cut since 2022, and even called for a hike as of the last meeting, we had an inflation problem then.
We have a deflation problem now.
The Fed’s whole policy paradigm is faulty. Inflation in final prices is months and years downstream of its activities, yet this is where it fixates. Asset prices, not consumer prices, register the current state of inflation.
Short term interest rates should respond to short term developments like other markets. The Fed’s suppression of short term rate volatility essentially forces it into other markets where it’s more damaging.
In what economic canon is it written that short term rates must only move slowly and unidirectionally, while every other market can move by the minute? It’s a completely artificial, made-up dogma.
No need to worry about big policy mistakes. Short rates could fall today and rise next week, if we had deflation today and inflation next week.
Of course here I mean a rising dollar or a falling one … not adhering to the pretense that inflation and deflation only exist as long term phenomena. That’s just a consequence of using measures that only examine long time frames. It’s mathematically impossible to have inflation or deflation over the course of a month or year without also having it over the course of a day or week.
So I conclude that if the dollar depreciates against virtually every other major store of value for even a day (prices rise), you’ve had a day of inflation, and vice versa … if it appreciates (prices fall), a day of deflation. Yes it’s unconventional, but logical consistency demands it. What conventional economics measures as inflation and deflation far downstream in consumer prices is merely the cumulative effect of all those days upstream in asset prices.
If short rates were more responsive to these short term developments, they wouldn’t have to build up into long term developments.
There is at least one simple solution. Manage the money supply and let short term rates take care of themselves. The evidence is overwhelming that the Fed’s rate management has brought great harm to the economy.
Powell is yet again intoning the tiresome catch-all that it is unable to make policy because of “uncertainty”. I literally can’t remember it being otherwise. Last year it was the “uncertainty” created by tariffs. Before that it was “uncertainty” because of the Ukraine war and before that the pandemic. Now it’s “uncertainty” due to the Iran war. When was there ever not “uncertainty” about the future?
This is a Keystone Cops Fed. First it assumes that it must predict the future in order to competently make policy, and then it complains that it can’t. If this isn’t an admission of incompetence, nothing is.
The solution is so simple a child could figure it out. Make policy based not on what you can’t know, but on what you do know.
Instead of following lagging data and trying to predict it, just follow the coincident data. Stocks, bonds, commodities, forex, are all telling you how your Federal Reserve Notes are faring … in real time. Keeping those notes stable is all you can do to minimize both inflation and deflation and avoid inflicting economic damage.
Another nugget of Fed mythology repeated ad nauseum today is the legend of the statutory “dual mandate”.
It’s like the assumption that CPI=inflation … a lie implied so often as if repetition could make it true. What’s the actual statute say? You understandably won’t find it in MSM financial reporting, but here it is:
12 U.S. Code § 225a – Maintenance of long run growth of monetary and credit aggregates
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
Where is the “dual mandate”???
All I can find is one mandate, followed by three ancillary goals.
How about you?
How is it that the Fed and the almost the entire financial media don’t?
I see the same. The Fed appears to have taken the role of a national planning commission concerned with long term growth and production. Talk about scope creep!
If we stick to the Fed’s language related to mandates, one can say it views the interest rate management as the third being bracketed with employment and inflation. Something that was not part of its original mandate/objective but is the most visible.
Oh, and don’t get me started on the “independence” trope. In the context of the Fed, “independent” is just a euphemism for “unaccountable”.
It wants to do whatever it pleases without answering to anybody. Wall Street doesn’t want the competition.
This morning virtually every asset class except those directly affected by the energy supply crunch fell out of bed, with the dollar racing higher as demand outstrips supply.
But the dozy Fed is asleep at the switch, confused by rising oil prices into thinking inflation is still the bugaboo. It clings to its lagging indicators, oblivious to the fact that inflation – and deflation – start in the asset markets, not the consumer markets that are months and years downstream. It’s also cowed by its own insensate doctrine that rates can move only in incremental, unidirectional steps. So the possibility of cutting in March and hiking in April, if need be, is too far out of its cozy little box to comprehend. It’s a deer in the headlights, frozen in inaction, unable to do anything unless it is convinced it can commit to keep doing it for months.
So it must wait until the evidence is overwhelming to snap out of its paralytic stupor. If only markets were free to set short term rates! They could rise and fall on a weekly, daily, or even hourly basis. like real markets do. And since they’re short term rates, there are no wild price changes as with long term yields, allowing them to act as shock absorbers for the markets at large.
This rigid adherence to dogma means that investors have to be prepared for deflation, and at the same time be on the alert for the sudden return of inflation when the Fed’s alarm clock goes off and its sleepy eyes flutter open. And then because of the same belief system, to realize the Fed may yet again keep its leaden foot on the gas pedal long after the deflation has passed, setting up the system for yet another bubble and bust cycle.
The bar is high – it is far more fond of committing policy error than of admitting policy error – but don’t be surprised if those sleepy eyes soon flutter open and the Fed, having only yesterday affirmed its do-nothing policy stance, announces an emergency easing of some sort. The far more alert bond market has already begun to respond with rate cuts just this morning.
Look beyond skyrocketing gas prices! If a stock market crash takes shape under President Donald Trump, the Fed is likely to be the catalyst.