The Federal Reserve’s Nightmare

This afternoon Federal Reserve Jay Powell did what he does best:

Screw up markets.

In the many months preceding today’s FOMC meeting, the insiders have been using their Fed whisperers in print and the audio-visual media to leak the “don’t worry be happy we’ll cut soon” idea to markets as inflation was finally under control.

Until they realized that inflation nor current levels of economic growth was logical or under control, based on the current Fed Funds rate.

The banking system was originally thought to be safe and sound or as the Fed said in previous statements “sound and resilient,” which ironically was removed from today’s FOMC issuance (see below).

To make matters worse, on the very same day that statement is removed, New York Community Bank imploded with a quarterly report which basically said that the Signature Bank assets they acquired via the FDIC’s shotgun wedding were losers, crushing the stock by almost 40% today on massive volume.

Jay should surrender the keys to the semi he drove over them today because Moody’s has already seen enough to warn everyone.

Ouch.

Thus begs the question as to why Jay and the Fed would remove that portion of the statement and come out full monetary war hawk. The answer is simple if one analyzes what is happening with the domestic economy.

Despite all of the talking down of inflation, the truth is that PCE is still over 60% above the target rate and worse, there has been no reduction in consumer spending. In fact an expansion of consumer credit usage has occurred by using the easy credit conditions originally created by the Fed which has expanded into a subprime lending disaster thanks to poor government regulatory practices. The only way to rein this bubble in will be for the Fed to hold rates much higher for longer and create some short term equity market pain while punishing the bond speculators at the same time.

Also for consideration is the fact that the Federal Reserve probably received a preliminary copy of the jobs data from the Bureau of Labor Statistics (BLS) to be released to the public on Friday. Based on the reaction of the FOMC today, the NFP data probably indicates moderate employment growth and small increases in hourly pay, thus killing the idea of any sort of wage disinflation to reduce overall inflationary pressures.

The yield curve (2/10’s) failed to dis-invert again and instead of pushing long term rates higher with a bond sell-off on his comments, bonds rallied strong with the US 10 year finishing the day below 4% at 3.942% as of this writing (8 pm ET).

The Fed has three paths now and none of them are pleasant for the casino, consumers, or politicians.

1. Maintain the status quo, hold rates above 5% throughout the year and hope that is sufficient to crush the inflationary impulses which are cycling through global markets for short periods several months at a time.
2. Keep rates at this level until the May meeting, cut by 50 bps and end QT. This will be a flirtation with 1978-79 stagflation but keep the political class satisfied with a speculative frenzy which should last until after the November elections despite crushing the poor. A hard course of action could be introduced next January to correct the past four years of insanely easy monetary policy.
3. Talk down inflation but hold rates by ending the BTFP and QT while introducing other “stabilization” programs for the banks that are in trouble with FDIC/Fed forced marriages yet preventing a market crash by keeping the consumers in the credit game. The Fed could agree to start a new program buying ABS and subprime assets from weaker banks as a temporary solution for 2024 to stave off a recession and keep the credit flowing to Main Street.

The main aspect of all of this is the specter of the elections which will overhang any decision the Fed makes. Thus why number 2, the stagflationary solution seems to be the most palatable to the elites because government welfare programs can be used to offset the ability to afford basic necessities and that always plays well to the masses in an election year.

The theory that the Fed does not cut rates excessively moving into the final months of a Presidential election cycle first became an obvious misnomer when Federal Reserve President Paul Volcker cut rates prematurely in May and June of 1980 by over 10% as his Fed speculated the stagflationary recession was ending and inflation contained.

Volcker’s Folly, as some economists called it, was to prematurely believe that despite persistent background inflation, the spikes or raging inflation of the past six years was over. As history and the chart indicates, he was incorrect and despite a relatively easy money policy compared to 1979, the incumbent lost the 1980 election.

Unfortunately for Ronald Reagan, his administration inherited 20% plus interest rates and a recession created by poor monetary policy decisions and bad legislative governance of the past decade which required harsh corrective action.

Fast forward to this election cycle and someone please find me any history in the last twenty years which indicates competent leadership in the Executive or Legislative branch along with signs of a stringent monetary policy that had no consequences for this current era.

Jay Powell is playing with fire and he knows it, thus why this tightrope act will continue for many months to come. If he cuts too much, too early, the fuse is lit for a 1980 style Paul Volcker style mistake as Powell, unlike Bernanke, can not make a political mistake which appears to favor either political party in one of the most socially tense periods in modern US history.

The dilemma is real and the current Federal Reserve leadership does not inspire any confidence that the hard decisions that must be made for the long term health of the American economic system are about to occur.

Got gold?

FOMC STATEMENT 01.31.24:

January 31, 2024

Federal Reserve issues FOMC statement

For release at 2:00 p.m. EST

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.

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