The Fed Announces
The Federal Open Market Committee announcement:
The bond market announcement:
Daily Treasury Par Yield Curve Rates
So let’s see what happens here. Stock prices are up big over the past year, but have leveled off over the past several weeks. In broad strikes, similar stories with commodities including gold. This indicates that inflation, while pretty significant over the past year, has become relatively quiescent in recent weeks. In its established way of doing things, the Fed’s decision is difficult. Hike rates, and cause the market to interpret it as the beginning of a whole series of hikes? Fail to hike rates, and trigger doubts about its refreshed commitment to quelling inflation?
If anything is clear to me, it’s the established paradigm that’s the problem. Without having boxed itself in, the Fed could hike today and reverse it next week if the data called for it. Or sit tight and hike next week if the data called for it. No meeting next week? Is this the 1970’s or something? No, it’s the 2020s and the age of instant global communications.
The real decisions are being made in real markets. The bond market is in charge of interest rates. It has been hiking rates, arguably for fear the Fed hasn’t been. So I vote for A, hike rates. If it doesn’t calm the bond market, reverse next week. Or next meeting, if that’s the best we can do. If it does calm the bond market … well … there ya go!
No change in target rate. We’re disappointed but not surprised. Disappointed because there was no surprise … this is exactly what markets expected. Fed funds futures, depending on exactly when you sampled them, were roughly 3:1 status quo versus hike. The Committee vote was 9:3.
You can talk about intent to abandon forward guidance, but the final proof would be did you do something the markets didn’t expect?
In point of fact, this FOMC may have been a bit more circumspect about it, but it just tipped its intent to hike at the next meeting. Three votes in favor of a hike versus nine for stand pat is as good as any dot plot.
The Warsh Fed is on probation. Given two opportunities to back up its tough talk with actual action, it’s whiffed on both. There has to be either a substantial decline in price inflation by the September meeting or tangible action. Three strikes …
The overwhelming consensus, both on the FOMC and in the media, seems to be that over five years of consumer inflation well in excess of 2% is unacceptable. I’ll take that as a gilded invitation for a big fat Financology I told you so. We pointed out the Fed’s error overstaying its 2020 easing, in prematurely abandoning its tightening campaign back in 2022-2023 and continuing to do so when it preposterously then eased with official inflation still well above 2%.
Which calls to mind another disappointment. Warsh, who has hinted at abandoning the FOMC’s 2% inflation target, has not done so. However emphatically he talks “price stabilty”, he has so far been unwilling to tangibly commit to it. Show us the money.
One of the questions that was asked in both the last press conference and this one is if you are so determined to get inflation down, why didn’t you hike today?
Indeed.
The bond market, incidentally, did hike today.
Markets continue to ratify their early reaction yesterday’s Fed proceedings. The dollar – the security the Fed issues – is down versus foreign currencies, down sharply against gold, silver, platinum and copper, and against US stocks, even as US stocks are down sharply against foreign stocks. The Fed, while swearing it would stand firm against inflation, effectively unleashed a fresh impulse of it. Markets are stridently questioning the Fed’s credibility. To rescue it, inflation must decline markedly by the next meeting or the Fed will have to act.
There is one striking difference between the media reaction and previous times Financology has criticized the Fed. This time the rest of the media are saying much the same thing as I am. I don’t know whether to feel validated or repudiated!
Bank of England held at 3.75%……………but warned its looking upwards.
Growth at a standstill…………
Meantime in ECCP
https://www.youtube.com/watch?v=Fghe-LD5k6s
ALL MEN I SEE………….