Market Gives Finger Formation to Fed’s Dot Plot Take

Shut Up! Shut Up!

Following the December rate hike meeting, Powell was asked about the Fed’s balance sheet and quantitative tightening.

We thought carefully about how to normalize policy and came to the view that we would effectively have the balance sheet run off on automatic pilot and use monetary policy, rate policy to adjust to incoming data. I think that has been a good decision. I think that the runoff of the balance sheet has been smooth and has served its purpose and I don’t see us changing that. And I do think that we will continue to use monetary policy, which is to say rate policy as the active tool of monetary policy.

Automatic Pilot

Automatic pilot, what a hoot.

Dot Thought Thickens

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Economic Wizards

At the December meeting six economic wizards expected three rate hikes in 2019. At the September meeting, four wizards thought four hikes were coming and one wizard penciled in five hikes!

Not a single wizard believed in cuts.

The market now believes the probability of at least one cut is 12.9% vs 15.2% for at least one hike. This far out, that’s an effective draw.

Real World

In the real world, bubbles eventually matter.

The problem is timing. It is very difficult to predict when things finally matter.

But when bubbles do matter, what the Fed then does or says is “Too Late To Matter.”

My assessment: A Fed-Sponsored Economic Bust is Coming no matter what the Fed says or does now.

Expect a credit collapse in 2019.

Mike “Mish” Shedlock