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Is the Fed Delusional or a Big Pack of Liars?

Let's discuss Fed Chair Jerome Powell's press conference following the January FOMC rate hike meeting.
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Jerome Powell, Fed Chair, Video Clip, FOMC Press Conference Jan 26, 2022

Jerome Powell, Fed Chair, Video Clip, FOMC Press Conference Jan 26, 2022

Despite Raging Inflation, the Fed Stands Pat in Wimpiest Statement Ever    

Earlier today I commented Despite Raging Inflation, the Fed Stands Pat in Wimpiest Statement Ever

Asymmetric Policy

For starters, the Fed is hiding behind Covid. It continues its amazingly asymmetric policy of being hyperactive after bubbles pop but being extremely accommodative until they do pop.

Inflation Thumb Twiddling

Inflation has been raging for well over a year and all the Fed does is admit "Overall financial conditions remain accommodative," with a pledge to "monitor the implications."

Press Conference Equally Wimpy

The YouTube video begins at the 53 minute mark. Before that, it's blank. At the 53 minute mark Powell speaks. At the 1:00:50 minute mark, Powell entertains a Q&A.

Powell: It will soon be appropriate to raise the Federal Funds target rate. .... Reducing our balance sheet will occur after the process of raising interest rates has begun. 

Mish: Inflation suggests it was appropriate a year ago. At the very least, expanding the balance sheet now is ridiculous. Yet the Fed will still expand through March 2022. The Fed made similar statements a year or so ago, and thus committed to let inflation burn higher regardless of what happened in the interim. 

Powell: Reductions will occur over time in a predictable manner. primarily through adjustments to reinvestments so that securities will roll off our balance sheet. ... The Committee has not made decisions regarding specific timing, pace or other details of shrinking the balance sheet. We will discuss these matters in upcoming meetings and provide additional information at the appropriate time.

Mish: This implies a very slow balance sheet reduction. In practice, it's highly likely the next recession hits before the Fed gets seriously underway with balance sheet reduction.

Q&A 

The Q&A begins at the the 1:00:50 mark

Chris Rugaber, Associated Press: Are rate hikes at consecutive meetings on the table? Is every meeting a live meeting? Would the Fed consider frontloading rate hikes?

Powell: It is not possible to predict with much confidence what path our policy will take will prove appropriate. ... We will be humble and nimble. ... We will be led by the incoming data. 

Mish: Just like the Fed was led by the incoming inflation data? Here's the real deal: The Fed will do what it wants and will bend subsequent wishy-washy statements to justify whatever policy it wants to set.

Nick Timiraos, Wall Street Journal: Apart from moving faster to shrink [balance sheet] holdings are there any other ways you and your colleagues are seriously thinking about recalibrating this process? And finally, how much disagreement is there on how you use tools? 

Powell: I am afraid to tell you those are all great questions, but those are questions the committee is just turning to now. 

Mish: This implies the Fed has been on autopilot all this time, and amazingly is still there despite huge inflation every step of the way. The Fed announced QE through March of 2022 and despite everything that happened, did not waver from announced policy. Yet, the Fed wants us to believe it will decide policy on the basis of incoming data!

Neil Irwin, Axios: Sir, I am wondering if the volatility we have seen in financial markets in the last few weeks shrieks of anything alarming that might affect the trajectory of policy. 

Powell: So, as you know the ultimate focus that we have is on the real economy. .... The markets expect a balance sheet runoff to begin at the appropriate time, sometime later this year, perhaps. We haven't made that decision yet. We feel like the communications we have with market participants and the general public are working. ... Monetary policy works significantly through expectations. So that in and of itself is appropriate.

Mish: Powell never really answered the question. But he did admit the Fed is not committed to balance sheet reduction but is committed to yapping. But if monetary policy worked significantly through Fed expectations, how the heck did the Fed undershoot inflation expectations for a decade only to now find itself in the opposite position? 

Brian Cheung, Yahoo Finance: Are asset bubbles factored into the conversation as you start thinking about hiking rates? 

Powell: Asset prices are somewhat elevated and they reflect a high risk appetite. I don't really think asset prices themselves represent a significant threat to financial stability and that's because households are in good shape financially. Businesses are in good shape financially. Defaults on business loans are low. 

Very Delusional Fed 

Jerome Powell and the Fed are delusional. To state that asset bubbles are only "somewhat elevated" shows the degree of delusion. 

This is undoubtedly the biggest financial bubble in history. Consumers appear to be in good shape only because of the asset bubbles.

The consumers without assets, the bottom 40% or so of the nation, have no assets. They have seen big wage hikes, but inflation has eaten every penny of it and then some. 

Tell those looking to to buy a home they are in good shape even though they cannot afford a down payment. 

Speculation in cryptocurrencies, junk bonds, nonfungible tokens (NFTs), SPACs, and speculative stock issues is at an all time high.

Margin usage is at an all time high.

Question at Hand

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Is the Fed really this delusional or are they a big pack of liars? 

In many ways I suspect both. Former Fed Chair Ben Bernanke denied there was a housing bubble.

Former Fed Chair Alan Greenspan warned of irrational exuberance in 1997 then in 2000 right before the dotcom bubble burst became a big believer in the productivity miracle.

Former Fed Chair Janet Yellen famously proclaimed she did not see another financial crisis "in our lifetimes". 

There is a history of constant delusion. 

How Bad are Inflation Models, Expectations, and Forecasts vs Reality?

Today, Powell reiterated "Monetary policy works significantly through expectations. So that in and of itself is appropriate."

What a hoot!

On October 1, 2021, I noted A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense

On November 24, 2021, I asked How Bad are Inflation Models, Expectations, and Forecasts vs Reality?

Also recall my August 31, 2020 post The Fed's Stupidity is Still Well Anchored.

Former Fed chairs Janet Yellen and Ben Bernanke were both big Phillips Curve advocates despite the fact the theory never worked even according to Fed studies.

Every Fed Chair since at least Greenspan believes in inflation expectations.

In 1958 John Kenneth Galbraith's 1958 proclaimed "It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought."

MishTalk TV #4 With Lacy Hunt: Is GDP Overstated?

This came up in my recent video Interview with Lacy Hunt MishTalk TV #4: Is GDP Overstated?

Mish: Lacy let's kick this off with inflation expectations. Ben Bernanke, Greenspan, Powell have this model. ... So much of consumer spending is actually not discretionary. So where do they get this idea that what people think will happen actually matters. What do you think about inflation expectations Lacy?

Lacy: It's not really possible to measure inflation expectations. I said that in the prior interview. You have to look at the fundamentals over a longer period of time, 2, 3, 5, years. And you basically have to take a very rational approach. You cannot extrapolate the current trends in inflation. And you need to ask yourself what determines inflation. ....

Fed Relies on Disproven Theories 

So yes, I believe the Fed is delusional in many ways. But they are also a big pack of liars. 

The Fed proclaims it looks at incoming data but its actions prove otherwise. 

Do they really believe asset prices are only "somewhat elevated"? 

I don't know, but there are either delusional or liars or both. I strongly suggest both.

The Huge Stock Market Bubble Just Popped and the Fed Can't Rescue It

Forget about the stock market reaction today. It does not matter much.

What matters is the big picture.

For discussion, please see The Huge Stock Market Bubble Just Popped and the Fed Can't Rescue It.

Liquidity has dried up and the most speculative issues have taken the biggest hit. Cathie Wood's ARK ETF is an excellent example.

The Fed has blown major bubbles and they will pop no matter what the Fed says or does or believes. 

This post originated at MishTalk.Com

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