Welcome to Fed Day boys and girls.
In the days of old, it was not a big event. Way way way back, when yours truly was a “young’un” the Fed meetings occurred with no fanfare, a small press release, no questions, no financial media drama queens, and few on Wall Street paying attention because the bond market figured out what was going to happen first.
Fast forward to the Great Financial Crisis. One of the architects of the great crash of 2007-2009, former Federal Reserve Chairman Alan Greenspan has all but disappeared. Yes, it is true he does speak publicly, but usually only to academic or business audiences for a considerable fee. To this day he has yet to acknowledge that the decisions he made in 2003 to 2005 were even partially responsible for the greatest financial disaster since the Great Depression.
Another voice one does not hear frequently is that of Ben Bernanke, the Sergeant Shultz Chairman of the Federal Reserve as the GFC impacted America. He knew nothing until he told the masses that he needed a large percentage of our income, the children’s income, and their children’s income to keep banks from failing and the US economy collapsing into oblivion.
In November of 1980, Jay Powell’s hero, Chairman Paul Volcker, decided to keep raising because in the first month’s of his chairmanship he realized the error he had made by holding rates steady and declaring victory over inflation. Economic growth, despite a strong period of increased inflation reflected in both the CPI and PPI, continued unabated. The American public adjusted to higher rates and continued buying homes, cars, and yes, color televisions. This part of the statement highlighted this fact:
Thus the policy action, as reflected by US bond yields was not a shock to the system yet:
Imagine the panic if the Federal Reserve today announce a 9% much less a 15% Fed Funds Rate.
Fast forward to Jackson Hole this year and think about what was said. In a recent article on these pages titled,Jay Powell Can Not Win Today, I warned about the following:
Unfortunately, the Federal Reserve has become an extremely sensitive political animal, subject to the whims of whichever party is in power at the moment. Hence I think instead of taking the Volcker approach of a hard line against a permanent embedded inflationary deterioration, Powell might well announce a pause or even prematurely declare “victory” over the monetary demons.
There is no good choice for Jay Powell in this morning’s speech. If he forces the economy and markets to take the necessary medicine to repair the damage done by America’s experiment with MMT and drunken Keynesian ideals, there will be bank failures, credit events, and even a severe recession if not a mini-depression.
But since 2024 is an election year, I fear the Fed will capitulate to the whims of political elites on both sides of the aisle.
And thus why today’s FOMC meeting will probably be a dud. The financial bubblevisions have all declared this meeting a “dead meeting” which means no language or course of action will change existing Fed policy.
This means that the Fed will in all likelihood keep the current peg at 5 1/4 to 5 1/2% with an eye on any overheating or resurgence of inflation. Naturally, this is once again too little too late. If the Fed even hints at allowing a lower floor for Core PCE, the reaction of markets will be to sell US Treasuries in anticipation of a 5.5%+ 10 year yield as a tolerance for higher for longer sustained inflationary pressures will be acceptable.
The word one is looking for from all that mumbo-jumbo is “stagflation” and due to the political sensitivities of the markets now, versus those of the Volcker Fed in 1980, odds are this will be an acceptable policy solution for the next twelve months until the Presidential election in 2024 is settled.
Unfortunately for the market, confusing signals are emerging when the Fed whisperer posts things like this on social media:
For Nick Timiraos to post this could be a warning shot that a surprise 25 basis point raise in rates could occur. However, it has been rare for the Fed to not leak the information about an upcoming decision to other reporters to allow markets to conduct window dressing operations at the end of the month prior to a FOMC statement.
The data the New York Federal Reserve posted is alarming for the central bank.
This is not indicative of a sustainable disinflationary period, but more of a stagflationary period for months if not years, if indeed growth declines rapidly and unemployment follows suit in Q4.
Regardless, it would appear that for political purposes, the FOMC will choose stagflation and pray; pray that our political elites find some sanity or that our economy grows out of this mess. I fear this mistake might be fatal for the future of the Fed as political retribution for a stagflationary recession in this era will be far more severe than that of the 1980’s.