The Fed delivered its expected statement at today’s FOMC meeting. All eyes were instead on the “Dot Plot” of interest rate projections for 2024 and 2025.
The Fed’s FOMC Statement is barely worth a look. Here are the first three paragraphs.
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.
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 have moved toward better balance over the past year. 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.
All Eyes on the Dot Plot
All eyes are on the Fed’s dot plot, and Summary of Economic Projections (SEP), despite the fact that the SEP has been radically wrong way more often than not.
The Fed is essentially clueless. Look no further than its interest rate range from 2.75 percent to 5.50 percent for 2025.
This is best translated as “We have no idea, but we insist on saying so.”
Nonetheless, all the Fed watchers are taking this in looking to front run the trade, whatever it is.
I fail to see how this is at all helpful and suggest the Fed instead focus on the near-term. Then again, the Fed failed to predict the immediate inflationary impact of the most QE in the history coupled with the biggest fiscal stimulus in the world.
Since the Fed cannot see what’s in front of its nose, perhaps the way to hide that is to make projections for 2026 and beyond.
Monthly Jobs Reports Margins of Error
Those numbers are for the first release. The numbers vary slightly by revision.
Yesterday, I asked What Are the Margins of Error in the BLS Monthly Jobs Reports?
In a range of 137,600 to 406,400 how can the Fed say with confidence that “economic activity has continued to expand at a solid pace. Job gains have remained strong.”
How Much Does the BLS Overstate Monthly Jobs?
Note: The numbers in all of my charts are unadjusted. They need to be because QCEW numbers are not seasonally adjusted.
The QCEW (Quarterly Census of Employment and Wages) is a count of Unemployment Insurance (UI) administrative records submitted by 11.9 million establishments. That’s about 99 percent of the data.
Nonfarm Payrolls are are from the Establishment Survey (CES). The sample survey was 666,000 individual worksites in 2023. That’s about 5.6 percent of the data.
I discussed above QCEW chart on June 6 in How Much Does the BLS Overstate Monthly Jobs? Here’s the Answer
In retrospect, by “overstate” I should say “differ” although in this case I am confident overstate is correct.
CES vs QCEW Full Year 2023
- CES: 155,211,000 to 158,269,000 (+3.06 million)
- QCEW: 152,525,000 to 154,848,000 (+2.32 million)
I do not have confidence levels on QCEW but they should be much more accurate than CES.
For the full year, the difference between QCEW and CES is 735,000.
The Fed is confident about 5.6 percent of the data, ignoring the message of 99 percent of the data.
Payrolls Rise 272,000 Employment Drop 408,000
The data is confusing and conflicting in many ways.
For discussion, please see Another Bizarro Jobs Report – Payrolls Rise 272,000 Employment Drop 408,000
Nonfarm Payrolls vs Employment Gains Since May 2023
- Nonfarm Payrolls: 2,756,000
- Employment Level: +376,000
- Full-Time Employment: -1,163,000
In the last year, jobs are up 2.8 million while full-time employment is down 1.2 million
Similarly, there is a huge discrepancy between Gross Domestic Product (GDP) vs Gross Domestic Income (GDI)
Real GDP vs Real GDI
GDP and GDI are two measures of the same thing. Income received should match product produced.
However, income is historically low vs GDP
For discussion of the GDP-GDI discrepancy, please see More Soft Economic Data, Q1 GDP Revised Lower, Q4 GDI Significantly Lower
GDI lends credence to the idea that the household survey (employment) is correct, not the CES establishment survey (nonfarm payrolls) with its assumed birth-death adjustments.
Importantly, QCEW fits in the picture as well.
QCEW, the Household Survey employment numbers, and GDI are in sync. The outlier is the nonfarm payroll report.
On that basis, coupled with weakening trends in hard data, I repeat my unpopular opinion: A Second-Quarter Recession This Year Looks Increasingly Likely
The Fed seems confident about the short term. I suggest they should be as confident about 2024 as they are about 2025, and that translates to no confidence at all.
Fed would have known today’s PPI numbers yesterday.
They are thus not being proactive when it comes to economy regarding stimulus and rate cutting preemptively.
Sound dollar policy would describe where they are at. Certainly compared to Bernanke, Yellen, or early Powell.
Hello, Mr. Mish,
The following is brought to my attention by a fellow SI member
https://www.siliconinvestor.com/readmsg.aspx?msgid=34698980
MEANWHILE STOCKS ENJOY THE HEAVENS, BANKS ARE GOING THROUGH HELL
Dario, June 6, 2024
It’s been some time since I first rang the alarm bell about the crisis unfolding in the Commercial Real Estate sector ( #CRE) in the US. Banks’ risk departments were largely ignoring this crisis, an issue I highlighted in my previous post, ”The great paradox of CRE lending: while owners are freaking out, banks are chilling”.
In addition to debt serving cost, another major factor for FED to consider rates?
Best
Arran (followed you on SI)
“The whole supply chain is subsidised,” said a senior official, who read through the charge sheet on a case that many predict could launch a trade war.
“This means that the Chinese government provides subsidies to all operators,” he continued. “Starting from the refining of lithium used in the batteries, to production of cells and batteries, to the production of BEVs [battery electric vehicles], and even transport of BEVs to EU markets.”
Chinese business representatives were shocked. After a quick scan of the numbers, an executive at one affected EV company vowed to start shipping hybrid cars to Europe instead, since they would not be subjected to such high duties.
https://www.scmp.com/news/china/diplomacy/article/3266406/whole-supply-chain-subsidised-inside-eus-blockbuster-chinese-ev-probe
We had a business that we sold in 2019 that made air purifiers in China – we received a subsidy payment for every unit exported.
Not sure why it would come as a surprise that the are subsidizing EVs….
This is also the business model of Temu.com … created to flood the world with subsidized china made products
Dropping to 2.75% then above 5% for 2025 fits perfectly with the 54 month low due in October. If the bond market doesn’t start a rally soon, then indications the longer term interest rate cycles are REALLY strong to the upside.
Higher inflation plus lower credit worthiness (I mean ability to pay, not the worthless credit rating from S&P or Moody)… only stupid people think interest rates will go down before Congress gets spending under control.
Lower interest rates would be 100% political, not economic, and everyone sees that. Foreign Treasury holders would anticipate a much lower dollar much sooner, and would dump their holdings as fast as they could (get out before everyone else). Every foreign holder who didn’t would suffer a huge permanent loss. A race to the exit would be catastrophic.
Rates are pinned around honest inflation (for now, about 5-6%) until Uncle Sam gets spending under control or it goes full banana republic (which would entail banana republic interest rates).
Slashing $3.5 trillion per year off spending needs to happen for Uncle Sam to be viable, but slashing that much spending isn’t something that can practically happen in one year — even for those of us who think Washington’s comeuppance is overdue.
Will Wall Street try to dump their Treasuries on stupid sheep who believe rate cuts are coming? like they did with mortgage bonds in 2008? That doesn’t mean rate cuts are going to happen. it just means the sell side is good at selling.
In 1910 MA foreign born adult population was over 41%, mostly poor Irish immigrants. MA flipped from R to D a hundred years ago. The progressive were against the railroads, against big businesses, against new immigrants but for a central bank. After Sherman Act repeal, the econ tank. The banks collapsed in 1907. Morgan, who was the target of the progressive, saved the banks. The progressive shamed Morgan. Their attacks were character assassination. Louis Brandeis and Joseph Eastman carried the attack for the progressive. They wrote many new progressive laws.
In 1912 the anarchist union : “The International Workers of the World”, the Wobbliers, struck American Woolen co in Lawrence MA . The anarchist destroy authority. They hurt the strikers and the co, but helped Woodrow Wilson. TR who became the progressive leader, a third party, torpedo the republican and president Taft. Under Wilson the Fed was born.
The creation of the Federal Reserve in 1913 was, and continues to be America”s worst and biggest mistake EVER!
The only way to determine if that is true would be for you to go back in your time machine, and somehow prevent it from happening. Then see what the result is over the next century.
What if it turned out that it was actually much better to have a Fed than to not have a Fed?
But you’ll never know. So your statement is worthless.
We cannot go back and change the past. And as individuals there is very little we can do about the present either.
All we can do is take advantage of the opportunities in front of us. And to make the best life possible for ourselves and those we care about.
Bitching, whining and complaining about things we cannot control is a waste of precious time.
Time for a new Compound Inflation Report/Compound Currency Devaluation Report
If May 2024 CPI were calculated Biennially it would be 7.54%, stating that prices are 7.54% higher than in May, 2022. If May 2024 CPI were calculated triennially, it would be 17.10%, stating that prices are 17.10% higher than in May, 2021. This Triennial CPI has dropped less than a percentage point in the last few months. .
4 year compound inflation has actually increased to 22.84%, up from the 20.05% I last reported in my March, 2024 Calculations.
Once again inflation is not simple inflation but is compound inflation. Triennial Compound CPI is approximately 12.00% greater than FED targeted 2% CPI goals for this same 3 year time period. 4 year compound inflation is even worse at 14.59% higher than FED targeted 2% CPI goals for this same 4 year time period.
Moving Forward it would take 7.29 years of ZERO PERCENT CPI to arrive at what the FED’s targeted 2% CPI would have produced with May 2020 as the base month 4 short years ago. I call this important number the “ZERO PERCENT CPI NEUTRAL AFFECT ADJUSTMENT INDICATOR” or ZPCpiNAAI for short.
Just the Facts.
I’m beginning to think that 2% inflation target was, uh… bullshit.
There certainly was a target, and that was the general population not engaged in financial chicanery.
Wall Street gamblers and reckless DC spendthrifts are demanding cheaper credit ASAP. Will the Fed comply?
No, by the time for the next decision in September Joe Biden will be so far behind in the polls that asking for a rate cut would be pointless.
As long as the T-Bill remains where it is, the Fed remains where it is. The Fed follows, does not lead. Best as I can tell, institutions have a huge Short T-Bill/Long 10yr hedge betting on lower rates. This is why T-Bills are at 5.2% when every psychology indicator is pessimistic. Pessimism should drive the T-Bill rate lower unless there is the hedged-bet as described. They are also betting on returns from high tech, esp AI related, to carry them through recession. Thus we have a very crowded bet with NVDA at near 40x Pr/Sales. AAPL mentions its AI plan and shares drive higher as well while industrial US is pumping record revenues with raised guidance are in decline. US fundamentals show no sign of recession, but pessimism acts like we have been in one last 2yrs.
The sole purpose of the Federal Reserve is to purchase worthless US Treasury bonds. 5.5% interest is the most our bankrupt nation can afford to pay and 5.5% is where T-Bond interest rates will stay. Consequently government largess and inflation will gallop ahead and continue to crush both taxpayers and the parasite class.
Let me finish that second sentence for you.
5.5% is where interest rates will stay until undeniable hyperinflation takes place.
Federal Government cannot even subsist on a 3% FED FUNDS rate.
Fiat guarantees that all Central Banks go to 0% forever eventually.
What a joke.
Real and nominal interest rates are different. Real interest rates are negative so we agree,
It really doesn’t matter what the Fed does later this year or next year because it’s just gonna aggravate the situation … sooner or later, they will not be able to kick the can down the road, and that time is coming sooner rather than later …
No confusion. No matter who is president in 2025, the rates are going to zero. Trump doesnt care about inflation, and his rich buddies need continued free money/zero percent rates (as in 2006-2020) to continue to buy up America (why do you think theres no houses left for sale and stocks are at all time highs?) And Biden needs all the votes he can get from interest-loving old voters, which he wont care about once he gets his second term and is seen by history as a successful prez. Plus $34 trillion needs to be continued to be financed, and you cant do that with any interest rate above zero. Zero in 2025.
Fed statement indicates they are following and not engaged in leading at this time.
This means that until economic damage manifests in economic releases there will be no change in policy.
There were no dissents about statement.
Juicing markets is no longer a tool available for stimulus. Even as markets still think they are best friends with Fed.
So who has it wrong Fed or markets?
Regular people are discovering they just do not have enough money to spend for their desires. Recession would follow right upon the discovery of consumer retrenchment.
Probably is happening right now or in third quarter. however until weakness shows up Fed is not shifting to stimulus mode.
The Fed should assume that inflation is going to be high just by paying attention. Here is my top 10 list.
1. Millions of boomers leaving the labor force due to retirement and being replaced by 2 or 3 people with a totally different work ethic.
2. Trade wars and more tariffs no matter who wins the election.
3. More regulations that impact costs. For those that don’t know your air conditioner in 2025 is going to be 30% more expensive because of regulatory changes. https://www.youtube.com/watch?v=E5YiSAqbzEQ
4. Higher insurance costs because that climate “hoax” is causing real damage and costing a whole lot of money.
5. Pent up demand – So many people waiting on the sidelines to buy homes, move, etc. All inflationary.
6. Presidential clowns – No matter who wins more inflation on tap. All platforms inflationary.
7. Congressional clowns – No matter which party in control, more inflation on tap. More free money for pork projects.
8. Stock market wealth effect – Everyone’s getting richer on gold, bitcoin, stocks, commodities, whatever, it’s all up all the time.
9. Social Security Socialism – By 2025, SS will be handing out $130b/month in free money to seniors. Throw in a trill or two for Medicare.
10. Wild cards – Avian flu, Covid redux, fungal spores, diabetes, cancer, heart disease, war, supply chain disruptions.
Perhaps it would be easier to try to figure out under what scenario could possibly come down and do that instead.
Pretty good list!
I’d share my list of how to profit from all of this but that’s shunned upon here. We have too many welfare queens that want a politician to save them instead of people focusing on saving themselves.
raytheon and goldman sachs………the greatest welfare queens evah. VA hospital system is total marxism too…………my little SS and free shyt army trinkets is just cute in comparison
A quibble: insurance costs aren’t going up because of climate change. There are no more wind storms, hail storms or hurricanes than in the past, no matter what NPR says. Insurance costs are rising because of inflated costs for repairs, and because of roofing companies mastering the art of sniffing out houses where hail damage can be claimed (even on a 29 year old roof). I know someone whose insurance company just shelled out $53,000 for a new roof (shingles) on his house. It didn’t help that this guy’s house is in a newly-declared “historic district” so every time they turned around they had to get approval from the historic commission. Blue city.
Nonsense, you have climate derangement syndrome and you are not paying attention.
https://www.texastribune.org/2024/06/06/texas-drought-crop-insurance-climate-change/
Payouts due to drought in Texas rose from an average $251 million per year in the 2000s to $516 million per year in the 2010s and $1.1 billion per year in the first four years of the 2020s, the data showed, rising at more than twice the rate of inflation.
…
“Drought and heat are expected to get worse in Texas,” said Anne Schechinger, author of the EWG analysis. “Climate change is going to increase costs for both taxpayers and farmers.”
But feel free to keep believing whatever nonsense you want and reap what you sow. I’m positioning for profits while you’re positioning for conspiracy theory cookery.
And here is another article from 2023.
https://www.texastribune.org/2023/11/30/texas-homeowner-insurance-climate-change-costs/
“Texas rates have increased 22% on average so far in 2023, twice the national rate. More billion-dollar disasters have occurred in Texas this year than any other year on record.”
But yeah climate change is a hoax and insurance companies are scams. /s
As the American economy has devolved into a service sector economy…. What actual production did these retiring and perishing Boomers actually produce that increased supply. Paper work, and flipping equities and assets is not aiding price stability.
I suspect that Fast Bear got the boot here for promoting generational hatred and suggesting that Gen z would deliberately kill off the boomers.
Maybe you are not far behind him.
Each generation has little control of the era they live in. If you lived in the 1700s, there wasn’t much of a service sector to work in. Ninety percent of work was on farms. Today that is less than 2%.
By 1950, the service sector had grown to 52% of the economy, and today it is 80%. There is nothing that any individual can do about that, no matter what their generation is.
Perhaps you would like your generation (whatever that may be) to return to the 1700s and do all manual labor on farms. Be my guest.
well stated
So other than bad data and bad policy … all is good? (forgetting the ~$500B Fed Loss after buying long-term bonds at low interest rates …marked HTM not MTM).
As Ron Paul said in his 2009 book, “End the Fed”:
“because it is immoral, unconstitutional, impractical, promotes bad economics, and undermines liberty.”
If astrology and Rorshach tests had a baby …
No cuts this year needed