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Fed Forward Guidance Has Been a Total Disaster, When Will the Fed Stop?

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39 comments on Fed Forward Guidance Has Been a Total Disaster, When Will the Fed Stop?

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Historical CME FedWatch data, select dates compiled by Mish.

Data for the above chart courtesy of CME FedWatch.

Question of the Day

When has the Fed gotten much of anything correct? 

The Fed strived for years to produce inflation with absurd QE policies. When the Fed finally got inflation, every Fed member plus Treasury Secretary Janet Yellen said inflation was transitory.

The market never believed in the Fed’s “higher for longer” message until just before banks started blowing up globally. Then things stunningly reversed as the lead chart shows.

Bond market volatility has been the most on record.

ECB Hikes Interest Rate by 0.50 Percent: “Inflation is Expected to Remain too High too Long”

On March 16, ECB Hikes Interest Rate by 0.50 Percent: “Inflation is Expected to Remain too High too Long”

I have no idea if the Fed still believes that or not. No one else does either.

But why does it matter? The Fed has no idea what it’s doing, it’s dot plot track record provides endless amusement. 

Besides, even if the Fed does believe that, it is highly susceptible of doing something else anyway.

By the way, the Fed wanted inflation and then some to make up for lack of past inflation. 

Will we see an apology or an appropriate policy for having too much inflation?

One Picture Explanation of Where We Are

Bond Market Volatility Rises the Most Since the Great Recession

On March 15, I noted Bond Market Volatility Rises the Most Since the Great Recession

Then suddenly we have gone from a 50 basis point hike to none at all for the March 22 FOMC. 

Never before have we seen such a amazing swings this close to an FOMC announcement.

The Fed finally convinced everyone that it meant higher for longer, then a few days later people are discussing rate cuts. What a hoot.

Expect some hedge funds to blow up over this bond market volatility.

That didn’t take long.

High Profile Hedge Fund Blows Up as Bond Market Losses Hit 25 Percent

On March 18, I noted High Profile Hedge Fund Blows Up as Bond Market Losses Hit 25 Percent

And as I type, a quick refresh of CME FedWatch shows an 88.6 percent chance of a 25 basis point hike on Wednesday. 

Expect BS

Expect the usual BS tomorrow about the Fed being data dependent. 

If they claim that again, you know, I know, and even they know it’s a lie. Right now the Fed will do whatever it can, not to reduce inflation, but to reduce bond market volatility. 

Dot Plot or Not?

Will the Fed continue its amusing practice of predicting what it will do when it clearly has no idea?

The Fed ought to stop, because forward its guidance has been either horrific or honored with horrific results. 

This post originated on MishTalk.Com.

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Mike Shedlock

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39 Comments
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JeffD
JeffD
3 years ago
“Pause with expected continued tightening at subsequent meetings”, would be the smart announcement. But we know the Fed is not very smart.
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Lisa_Hooker
Lisa_Hooker
3 years ago
I wish the Fed would quit treating the US economy like a piñatas.
It’s as if they keep waving a stick around in the air while blindfolded.
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SAKMAN
SAKMAN
3 years ago
Hmmm, all the bank saving is inflationary. . . don’t they need to keep hiking?
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Salmo Trutta
Salmo Trutta
3 years ago
Economists have been moving in the wrong direction for a long time. Powell and Selgin think banks are intermediaries between savers and borrowers. Selgin cites borrowing short term to lend longer term as proof. The banks are losing money on their time deposit business. Monopoly power has its consequences. There is a one-to-one correspondence between time deposits and demand deposits, as time deposits grow, demand deposits shrink pari-passu.
The American Bankers Association paid economists $3000 in 1961 not to debate the issue any longer. The ABA pulled the wool over your eyes. The rise in Reg. Q ceilings for the bankers, the nonbanks were never regulated before 1966, caused stagflation, business stagnation accompanied by inflation. The “Great Inflation” was during the monetization of time deposits (the end of gated deposits), the transition from clerical processing to electronic processing.
The Austrian business cycle is bunk. The FED and Congress have done all the damage. And now Powell has brought us to the brink. The economy is being run in reverse.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  Salmo Trutta
Banks serve as intermediaries between customer deposits and bank executives pockets.
This is not a bidirectional transfer.
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JackWebb
JackWebb
3 years ago
Fifth failure/bailout today: PacWest, i.e. Pacific West Bank.

Mish, a serious suggestion: Write about Glass Steagall. All of these failures are triggered by the VCs, i.e. early-stage i-banking. It crossed my mind about 20 years ago that we’d have another depression when all the people who lived through the first one had died off. Guess what?

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vanderlyn
vanderlyn
3 years ago
Reply to  JackWebb
glass steagall repeal was a disaster waiting to happen. also please always keep this in mind. the FED RES of NY where all the power to print and loan occurs, is privately owned. C and JPM own majority of shares. institutional investor summarized this years ago. it’s not tin foil conspiracy. only mandaate is to keep the owners solvent. the smaller country banks are just there to be taken by owners. of ny fed.
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MPO45v2
MPO45v2
3 years ago
It doesn’t matter what the Fed does because high inflation is here to stay except for minor short reprieves here and there because there are too many people leaving the labor force and there won’t be enough workers to back fill the gaps and congress is clueless about how to fix.
I monitor a variety of demographic data, the social security snapshots alone are very telling. You can look at them month to month. From January to February there were 100,000 people over the age of 65 that enrolled in social security benefits. Many people choose to wait longer to take benefits but retire at 60 something anyway. Add those plus the 100,000 and the US labor force is bleeding about 2 million people yearly give or take a few ten thousand.
And once you have major deficiencies in one area like construction workers then it gets that much harder to construct new buildings or maintain old ones and then there is a domino effect. Add another area like train engineers or truckers and then it becomes harder for goods to move from point a to point b. All roads lead to higher costs of everything (inflation) and lack of labor to grow, it’s a double whammy.
Businesses are being creating in turning the customer into their unpaid employees:
At the grocery store, there is a check out terminal where YOU the customer are the clerk scanning and bagging.
At the airport, you are now the person that puts tags on your airline bags and check yourself in.
In the future, you’ll order a home kit or 3D printer and probably print your own home yourself. You’ll still pay full cost but your labor will be free.
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TexasTim65
TexasTim65
3 years ago
Reply to  MPO45v2
“Businesses are being creating in turning the customer into their unpaid employees:
At the grocery store, there is a check out terminal where YOU the customer are the clerk scanning and bagging.
At the airport, you are now the person that puts tags on your airline bags and check yourself in.
In
the future, you’ll order a home kit or 3D printer and probably print
your own home yourself. You’ll still pay full cost but your labor will
be free.”
If you are old enough you’ll realize these things have been happening *forever*, not just lately.
When I was a kid I had jobs such as:
1) Bagging groceries and carrying them to the customers car
2) Pumping gas / cleaning windshield etc while customers sat in their car
3) Delivering Newspapers
Those jobs are gone now (minus places like NJ that still mandate someone pumps your gas for you). The ones you noted above are gone for the same as the ones I did as a kid are gone. They don’t generate enough economic benefit to pay someone to do them.
BTW you forgot to mention that most fast food places have replaced people taking orders with touch screen ordering and online ordering etc. Most places have just 1 person now taking orders (drive through line) and maybe 1 more at the counter.
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KidHorn
KidHorn
3 years ago
Reply to  TexasTim65
Not to mention secretaries. Have probably declined 99% since 1970.
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MPO45v2
MPO45v2
3 years ago
Reply to  TexasTim65
Well I rarely visit fast food places but you are correct. I do see my kids using apps on their phones to pre-order the crap food at fast food places. My broader point is that the “luxurious” lifestyle people in the west have become accustomed to came from cheap plentiful labor and those days are gone so it doesn’t matter if the Fed raises rates to 10% or lowers them to 0% because there won’t be enough labor either way.
The only two places with cheap plentiful labor are India and parts of Africa but they have poor infrastructure and educational systems there to replace the old dying west populations. The net result will be higher inflation, lower availability of goods and services, and lower quality of life for most. Day by day everyone will get a bit poorer and poorer.
There is also a huge shortage of labor on farms across america so food shortages will come at some point and people will be forced to grow their own gardens and perhaps raise their own chickens. Easy to see why Bill Gates has been buying up farmland, at least he knows its coming.
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JackWebb
JackWebb
3 years ago
Reply to  MPO45v2
I’d rather pump my own gas.
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WarpartySerf
WarpartySerf
3 years ago
“The Fed has no idea what it’s doing”
Absolutely. Everybody knows we have 15% inflation – people are posting that when punching the numbers into Volcker’s CPI calculator.
And yet , Powell is at 4.9% Fed Funds rate, while Volcker’s Fed Funds Rate in 1982 was 16%.
Powell and Kashkari, etc. should all be in jail for their counterfeiting of the US currency.
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Scooot
Scooot
3 years ago
Conditions have already eased considerably since the beginning of the month, 1 year and 2 year yields are 38bp and 72bp lower respectively . No hike would give another easing signal, even a 25bp hike without the appropriate ongoing rhetoric etc would signal further easing. It would also encourage more duration mismatch and risk mismanagement, the current cause of the current financial woes. Accurate forward guidance is important this month.
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Jack
Jack
3 years ago
Half of the Fed’s 2022 QT gains has been given back over the last week.
Probably will be back to May 2022 balance sheet in next week or two.
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Maximus_Minimus
Maximus_Minimus
3 years ago
The concept of forward guidance is a joke. It’s like telling a gambler the odds.
Now a perma feature of the bankrupt financial system.
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JackWebb
JackWebb
3 years ago
Reply to  Maximus_Minimus
I disagree, and strongly. Alan Greenspan was a master at forward guidance, he really was. But he had more brains in his left big toenail than all of today’s economic policy morons. It’s not the guidance that’s the problem, but rather who gives it and how smart they are.
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MarkraD
MarkraD
3 years ago
Reply to  JackWebb
Oh yes, Greenspan truly mastered forward guidance in the lead-up to Dot-Com and Sub-primes.
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Jack
Jack
3 years ago
Reply to  MarkraD
Greenspan was a master of innuendo.
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Maximus_Minimus
Maximus_Minimus
3 years ago
Reply to  JackWebb
Forward guidance was introduced after Greenspan and GFC to remove financial analysis based decisions, and not to spook markets. It’s a new feature of a broken system. Guessing how much the FED will print is not a financial analysis.
Greenspan generalities and assurances don’t count as forward guidance.
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hmk
hmk
3 years ago
Reply to  JackWebb
He was the godfather of suppressing interest rates below normal market rates and was complicit in creating two of the biggest bubbles in market history.
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Salmo Trutta
Salmo Trutta
3 years ago
Reply to  JackWebb
Greenspan’s “Great Moderation” was due to an increasing volume and proportion of bank deposits being shifted into time deposits. That destroys the velocity of circulation, Vt.
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JackWebb
JackWebb
3 years ago
Reply to  Salmo Trutta
One of these years, you will stoop to conversing in civilian English. Absent that, I consider you Nostradamus II. Lay another quatrain on me, brother!
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dtj
dtj
3 years ago
I predicted the Fed would raise rates just one final time by 25 basis points and then stop. That brings the terminal rate to 4.75-5%.
The Fed already cooled off the housing market but doesn’t want to kill it. Mortgage rates higher than 7% will do that. And now, the banks are in trouble. Does the Fed care more about the banks than anything else? Yes.
I actually wouldn’t be surprised if they hold interest rates steady tomorrow in light of the bank failures, but if they do raise, it will be the last time.
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Matt3
Matt3
3 years ago
Reply to  dtj
Makes sense as the Fed is owned by the banks and works primarily for the banks.
Secondarily, they have a couple of congressional mandates that they look at.
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HippyDippy
HippyDippy
3 years ago
Mish! Please be nice. They are the finest the Ivy League has to offer! I’m sure they have an endgame. Just be patient and ignore their track record completely. What could go wrong?
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1-shot
1-shot
3 years ago
Actually, since they started telegraphing their rate increases (back in late 2021), the fed has done exactly what they said they were going to do and theyll probably continue to do so by raising another quarter point tomorrow and then two more times after, just like they told us.
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Mjs357
Mjs357
3 years ago
Reply to  1-shot
Correct! Thank you! Finally someone without an observation bias.
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JackWebb
JackWebb
3 years ago
Reply to  Mjs357
Whatever anyone here might say about Greenspan, there were never any monetary policy surprises out of him. At least none that I can recall now. Once you learned Fed-speak, he was clear as a bell. As for what Powell will do, well, I don’t think he’s been nearly as clear and in no way as steady as Greenspan was. There’s a reason why gold was in the $300s in the 1990s. Alan Greenspan set a 2% inflation target, and by God that’s what he delivered. No matter what you think of the Fed, that man kept the promises he made. How often does that happen?
Oh, and in the ’90s we had Robert Rubin at Treasury, not some stupid, untalented, shifty-eyed bimbo who ought to be a cocktail waitress in some dive bar on the wrong side of the tracks. And for all of Bill Clinton’s hijinks in the Oval Office, he produced unified budget surpluses before the end of his second term. I remember that crew fondly, warts and blunders notwithstanding. I remeber standing with a relative in my backyard in 1996, and telling him: “These are the good old days.”
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JackWebb
JackWebb
3 years ago
Reply to  JackWebb
So my followup was rejected for telling the truth. Oh well, it was fun to write.
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Jack
Jack
3 years ago
Reply to  JackWebb
Greenspan did not deliver 2% inflation. Moving manufacturing overseas to low cost China keep cost of goods low.
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JackWebb
JackWebb
3 years ago
Reply to  Jack
Um, that’s still in place. Where’s the 2%? Inflation is always and everywhere a monetary phenomenon.
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Jack
Jack
3 years ago
Reply to  JackWebb
Production of most widgets has now moved. Outside of some niche industrial and commercial equipment, impossible to buy anything not made in China. No more gains to be made there. Mfg has pretty much hollowed out.
Turning point trigger was 15% inflation in China over 2021-22 and historic money printing in west. Inflation, once established can be self perpetuating.
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JackWebb
JackWebb
3 years ago
Reply to  Jack
Nice deflection, but utterly groundless.
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KidHorn
KidHorn
3 years ago
Reply to  1-shot
If they raise rates, they’ll have to expand their balance sheet. They have to pick what tightening mechanism to give up on.
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Salmo Trutta
Salmo Trutta
3 years ago
Reply to  1-shot
Powell just jacked up reserve balances. He’ll have to unwind them.
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Six000mileyear
Six000mileyear
3 years ago
Central banks follow bond yields. Rates will generally drift lower over the next year into the 4-year cycle low. This gives banks breathing room to allow longer term bonds mature. Depositors will continue to get low interest rates until long term bonds start to mature.
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Scooot
Scooot
3 years ago
Reply to  Six000mileyear
They’d just buy more bonds wouldn’t they, in the belief the Fed would never let bond yields rise?
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Mjs357
Mjs357
3 years ago
Reply to  Scooot
Greenspan did not have to contend with QE $9T in MBS…left before the Recession, multiple other crisis, Federalized healthcare, more QE, Plandemic. trillion dollar deficits. Times they have changed and the Fed is more politicized then ever. Everyone chooses sides rather what’s right or wrong to maintain power, control. How many billionaires have been created since the War on Terror started? All that free money…Fed serves two masters, the stock market and party. All that money FJB spent last year, bills are coming due. Greenspan started the bail-out trend…he was direct though and if you listened without a bias, he did what he said. Powell has been that way for me as well aslthough he walks a more limp political tightrope.
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