The Fed Is Not On Our Side

Authored by Kevin Muir via The Macro Tourist,

Going to make today’s post short and sweet.

Recently the market has gotten somewhat excited that the Federal Reserve might slow down the rate of Federal Funds tightening. This has been the result of three developments:

  1. A few speeches from FOMC Board members that indicated the Federal Reserve was concerned about the flattening yield curve, and that the Fed’s goal would be to ensure it doesn’t invert.

  2. A recent phenomenon where the effective Fed funds rate is trading at a higher spread to IOER (interest on excess reserves).

  3. The increasing troubles in certain emerging market countries as US dollar liquidity has tightened.

Between these three concerns, the market has built a “dovish hike” into today’s FOMC announcement. Many participants believe the Fed is more likely to slow the pace of tightenings as opposed to increasing it.

Well, sold to them.

I am not claiming to know what the correct policy should be, but I am confident that Jerome Powell’s Federal Reserve will not alter course for any of these three reasons.

The Federal Reserve will hike at least every other meeting until something breaks. Full stop.

Powell will not reduce this pace because the 5-30 spread is hitting new lows. Nor will he care about the effective Fed Funds spread over IOER. And finally, the Federal Reserve has a mandate to set policy for the USA and will not alter course because of emerging market wobbles.

Additionally, there have been stories indicating the Federal Reserve is considering holding press conferences every meeting as opposed to every second one. Although there are plenty of good reasons to change this policy, I believe that Powell is worried he will have to raise rates at a quicker pace in the future.

Let’s face it, on the metrics that matter to the Federal Reserve (employment and inflation), the signals are all pointing to an economy that needs higher rates.

I know true Fed-watchers will tell me that initial claims and CPI are not preferred Federal Reserve indicators, but that’s splitting hairs.

The truth of the matter is that the US economy is doing well. In fact, beneath the hood, it might even be booming.

We are so far away from the Federal Reserve slowing down the rate of hikes. The economy is doing well. Stocks are on their highs. Unemployment is hitting new lows. Inflation is ticking at cycle highs. If anything, I expect the Federal Reserve to increase the pace of tightenings - not the other way round.

I am not sure what this will mean to asset prices, but be careful in assuming the Fed is on financial markets’ side...

Comments

I Am Jack's Ma… Wed, 06/13/2018 - 10:18 Permalink

The Fed is simply a means for bankers to extract wealth from the public’s labor.

That’s all it is when there is a cartel of private banks issuing the public currency as a loan at interest.

The rest is window-dressing.

ravolla wadalt Wed, 06/13/2018 - 11:00 Permalink

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In reply to by wadalt

karenm NidStyles Wed, 06/13/2018 - 11:44 Permalink

I laugh at those who think the FED has to keep this up because the economy will crash if they dont.

 

Never occurs to them that if the FED were so committed to the economy, they wouldn't blow bubbles like this in the first place. CB's are globalists, a term many need to acquaint themselves with, and globalists build and destroy, according to their current agenda. They are not one dimensional, as most are, thinking it's always about growth and prosperity.

 

The time to destroy is at hand, and they will indeed destroy

In reply to by NidStyles

LawsofPhysics I Am Jack's Ma… Wed, 06/13/2018 - 10:39 Permalink

Correct.  A monetary system that is completely detached from reality...

...bankers and financiers give themselves access to all the money they want with no real work, no real risk, and no real collateral requirements!

Everyone else has to face real risk and perform real work to "earn" their money.

No worries, such "let the majority eat cake" monetary experiments have been tried before, this one will turn out no differently.

In the meantime...

"Full Faith and Credit"

same as it ever was!

In reply to by I Am Jack's Ma…

TrustbutVerify I Am Jack's Ma… Wed, 06/13/2018 - 10:41 Permalink

Labor doesn't have to equate to stupid. They, to the degree they are able, can invest and make long term decisions in their best interest.  

The problem lies, as is so widespread in this country, in the thinking that the government is going to come to the rescue, no matter what happens.  So, people (labor) go the route of spending their money as fast as they can on useless, time wasting ways of life - "staying connected" -unsmartphones, internet, cable TV - all with astounding monthly recurring costs), latest largest TV, excessive automobile expenses (with loans often 70 months), eating out too often, and buying foreign goods made by slave wage countries - that ultimately undermine their own job security.  

The main reasons that some immigrants that have come to the U.S. have done so well (Viet Nam immigrants) is that they simply work hard, done spend excessively, and keep their families intact.  And in almost any circumstance, they save.  

Part of the challenge for this country is the collective consciousness doesn't allow for the finger of blame to be pointed at the citizens themselves to point out stupid, unsustainable habits and culture.  

In reply to by I Am Jack's Ma…

mo mule Wed, 06/13/2018 - 10:28 Permalink

Well lets hope they see the need to raise rates by at least 1/2%. They are so far behind the curve......they need to raise by 1.50%
just to be even.........LOL

Nunyadambizness Wed, 06/13/2018 - 10:55 Permalink

The FED is a cartel of private banks stealing from We the People.  There was a reason the Founding Fathers didn't want a central bank (nor a democracy, but that is a different subject), but through the intentional omission of historical facts surrounding central banks and fiat currency, the people have been buffaloed into believing the "fed" works in our best interest.  Nothing could be further from the truth.

END THE FED.  Restore financial liberty to We the People, and end the propagation of fiat currency based on bullshit "full faith and credit"--there is little faith left in this fiasco.

enough of this Wed, 06/13/2018 - 10:56 Permalink

The Fed knows it went to far to boost the stock market artificially to all-time highs while destroying real price discovery . 

The markets have had a ten-year bull run. The Fed needs head room to lower interest rates later when the SHTF and the economy tanks.  Unfortunately, the Fed's move in boosting rates is too little too late.  Strap yourself in.

moonmac Wed, 06/13/2018 - 11:33 Permalink

If you're on our side do another QE to get us out of these doldrums. Jan sucked. Feb & March was awesome(thank you MSM Trade War talk). May was weak and June started off ugly as sin. Liquidity ended now it’s all hype and innuendo.  

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rejected Wed, 06/13/2018 - 13:16 Permalink

"The truth of the matter is that the US economy is doing well. In fact, beneath the hood, it might even be booming."

The hedge's 'economy is awesome' article for the day!

Beneath the hood!  I like that,,, That's how you speak to the layman. (lol)

VideoEng_NC Wed, 06/13/2018 - 23:37 Permalink

People here are way smarter than me yet I’m amazed we spend this much time & effort coming to this conclusion when it should just be engrained in our knowledge like 2+2.  The Founding Fathers never wanted it, all of Hollywood & Broadway applauds the guy who championed the concept.  Centralized means all eggs in one basket...is that good financial strategy?