The Fed Announces
The Federal Open Market Committee announcement:
The bond market announcement:
Daily Treasury Par Yield Curve Rates
So we have a hike. It’s hardly unexpected given that, as I pointed out then, the FOMC effectively tipped its intent to hike last meeting and more recently CME futures have been placing 90% odds on it. Nor is it inappropriate given that inflation has been running way above the Fed’s target for five years. It’s way overdue. The Fed already has egg on its face for the plainly inappropriate cuts it’s made since the last rate hike cycle. There never was any justification for those cuts, and we’re not just Monday morning quarterbacking; we said so at the time; all we got was vague worries about possible unemployment as jobless rates plumbed multi-decade lows and bald assertions that policy was “restrictive”. Now the Fed has more heavy lifting to do for its failure to finish the job last time. Today’s action shows it’s doing that.
12-0 slam dunk
BOE tomorrow
Unanimous decision indeed. This looks very good for Warsh, especially after the 3-9 decision last meeting. The Fed at long last has decided to take away the punch bowl. Better late than never.
I’ll leave the BOE to you, but will say today’s Fed decision makes it easier for it to hike.
After trading to a yield of 5.00% yesterday, the ten year treasury continued to 5.01% today.
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202609
I’m still near term bullish on Treasuries however and believe that the path of least resistance for yields over the coming weeks is lower rather than higher. At these stock valuations, Treasuries, with all their faults, look attractive in comparison. Today’s decision at the margin supports that as it gives the Fed a much needed credibility boost.
Long term the outlook remains bearish. Unless and until the fiscal chasm begins to be addressed the incentives to inflate are powerful. Today’s action is near term deflationary and supports Synthetic Systems’ outlook for a stock market selloff over the coming weeks, today’s declines included.
Much too soon for a victory lap but Treasuries are up sharply today. I think there’s more where that came from. Treasuries (eg GOVT) of course are the most direct way to play this notion, but those already fully allocated could also consider gold and real estate (eg IAU and REET).
Treasuries are down again today. But the pattern of lower lows and lower highs has tentatively given way to higher lows and higher highs, lending further support to our near term bullish thesis.
The bond market continues to be weighed by massive supply due to government borrowing more recently joined by infotech borrowing, a sector that has until recently financed most of its capex from organic earnings. If I’m right these bearish factors will be temporarily overcome by a more credible Fed.
Does that mean you should buy GOVT? No. I’m buying because I went underweight relative to my target allocation earlier and now am merely reducing that underweight. There is no such thing as an asset that is inherently a “buy” or a “sell” … it always depends on how much you have already.
Kevin Warsh opens his comments with focus on inflation
“Federal Reserve Chairman Kevin Warsh opened his press conference comments on Wednesday with a focus on inflation, citing strength elsewhere while price increases continue to run above target levels.
“Productivity growth is strong and capital investment is robust, job gains have kept pace with the workforce, and the unemployment rate has changed little,” Warsh said. “But inflation remains elevated. Today’s policy action will support a timelier return to the committee’s 2% goal.”
“Our predominant focus is on the price stability side of our mandate,” the chair added. “The plain fact is that inflation is too high and has been for too long.””
Stocks sink as Warsh reiterates focus on fighting inflation
“Warsh framed the Fed’s policy decision as offering “good news” for Americans who don’t own financial assets or have home equity built up. He said that price stability helps consumers because “when they get their wages, they can put their head above water and deliver real take-home pay increases.””
Kevin Warsh just put Wall Street and investors on notice
“In Warsh’s prepared remarks to the press, he highlighted a strengthening American economy, noted that job growth and the unemployment rate have been favorable, and claimed he’d be “hard-pressed to describe broad financial conditions as restrictive.””
“But inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s two 2% goal. This Committee will deliver price stability.”
Fed approves interest rate hike, signals one more to come this year
“Economists also see expanded investment in artificial intelligence as a potential inflationary factor.”
It’s not a cause of inflation, it’s an effect of inflation. The surfeit of easy money has blown a bubble … this “expanded investment” is merely a conduit between easy money and final price inflation.
Stock futures are little changed after Fed’s rate hike spurs a market sell-off: Live updates
““Higher oil prices stemming from continued conflict in the Middle East could keep inflation elevated, but monetary policy works with long and variable lags, and additional increases would put more pressure on consumers and businesses already facing elevated borrowing costs,” he added. “The Fed should give this increase time to work before determining how much additional restraint is necessary.””
This kind of thinking has already been tried. As a result American families have been shouldering the burden of high inflation for over five straight years. It’s inflated a stock market bubble, blown out the wealth gap, and created an affordability crisis.
Indeed “monetary policy works with long and variable lags”, but that’s why the effects of the Fed’s 2020 moneypalooza still linger and still need to be corrected for. The Fed already chickened out once in taking back the inflation it created and cut rates before bringing inflation back even to its own inflated target. If it just takes back those unjustified cuts in the next three meetings it’s only less too late. Had those cuts not taken place it might very well have been appropriate to entertain cuts now.
I’d rather see the Fed stop targeting rates altogether, but as long as it’s doing that now the right Fed funds rate is 4.5%.
Stanley Druckenmiller sees a Fed problem Wall Street can’t ignore
We have a great setup for a good old fashioned bear market. Stocks could decline 20%-40%. Not only do we finally have a Fed head serious about reining in inflation, but it comes at a time when stock prices are extraordinarily high.
Let me repeat the above report from Chairman Warsh’s press conference:
“Warsh framed the Fed’s policy decision as offering “good news” for Americans who don’t own financial assets or have home equity built up. He said that price stability helps consumers because “when they get their wages, they can put their head above water and deliver real take-home pay increases.””
“… good news for Americans who don’t own financial assets …”
This is about as loud and clear as Fedspeak gets. Warsh is watching asset price inflation like a hawk.
He can’t come right out and say “I’m going to start a bear market.” but this is about as close as you can get. Code words for tightening until asset prices come down if I ever heard them. I’ve been saying for years that’s where inflation shows up first. It’s almost enough to make me wonder if he’s been lurking at Financology.
Alas it’s not good for gold prices either. It might be good for gold buyers though … we could again see sub-$4000 gold prices, another chance to add to positions at attractive prices. In the longer run, they’re going higher. Not only will federal debt pressure be brought to bear, but Wall Street craves easy money and will find a way to get it. That’s what it created the Federal Reserve for.
Paul Volcker 2.0?
BOE tells Mega to drop dead
Bond Markets Like What They Heard From Fed Chair Kevin Warsh
The Fed’s Inflation Target Keeps Slipping Farther Into The Future
Price stability is 2%….it’s bonkers. The contradiction is right in your face.
That’s like saying the temperature is constant because it only rises two degrees every year…Or a leaking bucket only loses it’s water 2% a year. One way you’re slowly boiled to death the other you die of thirst!
I couldn’t agree more. We have excess inflation in multiple degrees. On top of the arbitrary 2% target, we’ve been exceeding that for years. On top of that, official statistics systematically understate it via statistical legerdemain like hedonic adjustments, exclusion of major categories of prices like houses, etc. If the CPI were calculated the same it it was before 1980 it would be running several percent higher. No mere coincidence that these innovations were introduced once Social Security benefits and income tax brackets were indexed.
Not that government is the only constituency profiting from inflation. Wall Street may be its biggest booster. Inflation higher than what people can earn on savings accounts has forced massive sums into its wares. Millions of captive buyers for their stocks also let corporations self-serve with impunity. Inflation is a covert means of wealth transfer whereby the powerful transfer wealth to themselves with neither the knowledge nor consent of the victims. The price influences of inflation are a mere side effect in comparison.
Fed Chairman Kevin Warsh has said “inflation is a choice“. “You bet it is.”
I don’t claim to have an inside track into Kevin Warsh’s head, but believe this is what he means when he says the quiet part out loud … that inflation is a choice.
Fed’s Goolsbee: Strong demand may be adding to US inflation, ‘no ambiguity’ how Fed would react
“If demand overheats, there is no ambiguity about how the Fed needs to respond,”
You could look at it that way, and alas too many economists do. But here’s another way:
Demand is infinite. There is no limit to human desires. But it can only drive up prices when that demand is backed up with cash. I can hold my breath until I turn blue “demand”ing stuff, but unless I open my wallet, it has no effect on prices.
This may seem trivial, but it makes a crucial point. Inflation comes from money. As Nobel Prize winning economist Milton Friedman once put it, “inflation is always and everywhere a monetary phenomenon”.
Supergiant corporations don’t just “demand” massive amounts of energy and materials to built data centers without having massive amounts of cash to do their demanding with. Governments don’t prosecute wars without having access to massive amounts of currency to demand weapons with. Neither of these can cause inflation … they are but way stations on the road from money to final prices.
I categorically reject this imagery that inflation comes from anywhere other than the banking system, and that it’s the banking system’s job to fight it.
Central banks aren’t the fire brigades, they’re the arsonists. They can choose to stoke the flames and how much.
Inflation is not things going up due to excess demand, it’s money going down due to excess supply.
WTF?
The Case for a Fed Pause Strengthens
Flabbergasting. The Fed executed seven quarter point rate cuts while “inflation” was above its own 2% target. It then paused for several meetings, while it was still above its 2% target. Finally, with inflation still above its target, it raised rates once, just two weeks ago.
And now … it’s time to “pause“???
Oh … no … the case for pausing just got stronger … meaning there must already have been a case for pausing even before starting … or at least immediately afterwards.
You can’t make this stuff up.
Eitelman’s argument is focused on financial markets, corporations, and governments. Nary a word about the long suffering average family struggling to make ends meet.
This is the kind of “thinking” that got us here in the first place.
President Donald Trump is very seriously thinking about curbing diesel exports, but the repercussions could be disastrous
“For 66 months and counting, the prevailing inflation rate has been above the Federal Reserve’s long-term 2% target. Clearly, this isn’t all of President Trump’s doing. However, the surge of inflation that we’ve witnessed since February, from a reported annualized rate of 2.4% to a peak of 4.2% in May, can be almost entirely attributed to the president’s policies.”
This is flat out fabrication. The Fed did seven quarter point rate cuts, the last one in December, only two months before February. There is no way to exclude those rate cuts … except maybe by just not mentioning them.
It ‘works like a tax on the economy.’ Bank of America economists warn Kevin Warsh’s Fed strategy poses a risk to markets — how to protect your money
“But Warsh’s reluctance to lay out what comes next has some economists worried that investors aren’t getting enough information to understand how the Fed will respond to changing economic conditions.”
Who’s economy? Wall Street’s?
“The BofA economists argue that the resulting risk premium “works like a tax on the economy,” according to TheStreet (3). Higher Treasury yields can filter through to mortgages and other loans, making it more expensive for consumers and businesses to borrow.”
Teetering perilously close to the truth. Years ago when it first came into vogue I pointed out that predictability itself was a form of monetary ease, because less uncertainty enables more leverage. Warsh has it exactly right.
Stop squeezing Main Street: Washington spent the money, but the Fed is making small businesses pay the tab
Another piece pleading for the Fed to keep rates low. This rambling, semi-coherent article opens by highlighting some prices that haven’t risen and implies that inflation is good for Main Street, while citing the importance of families’ purchasing power.
“Five years above target establish the need to get policy right. They do not establish that another rate increase is the right next step.”
Uhmmm … so the Fed should just continue to do the same thing it has been and expect a different result?
“Chairman Kevin Warsh has identified who bears the consequences of getting it wrong. At Jackson Hole, he warned that people without financial assets are especially exposed when the Fed misjudges inflation or the economy. They face higher prices or less secure jobs. His warning captures what is at stake: families need purchasing power and the opportunity to earn a living.”
Huh??? The point Warsh actually made was that the Fed’s getting serious about reining in inflation was good news for people who don’t own financial assets. Varroney garbles the message. He doesn’t say what he means by “getting it wrong” (that would require a clear argument), just lets the reader imagine what “getting it wrong” would be.
As of the end of last week, the one year Treasury was trading at a yield of 4.46%. With Fed funds at under 4%, this means the Fed is in a position of ease relative to the market.
Media expectations are now that the Fed will hold off on further rate hikes until December, taking a pass on October. If this is correct it’s a lose-lose proposition for the Fed … either the media are wrong or the Fed is still issuing effective forward guidance. If the media are right the Fed is not as determined to get inflation down in a “timely” manner as it represents. Refraining from acting due to the proximity of the mid term elections would also undermine the Fed’s claims to be apolitical.
Ultimately it’s not about what the Fed says but what it does. If the media continue to correctly infer the Fed’s moves before it makes them, then the Fed is either following the media or leading it. Only if the Fed surprises markets with a policy action will it have been proven to have moved away from forward guidance.