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Stocks, Gold, Oil, Rip Higher as Dovish Powell Wins Hoot of the Day Award

The Fed meeting was very dovish. Fed chair Jerome Powell's Q&A was even more dovish. In response, markets ripped higher. Alas, it won't last. Finally, let's discuss credibility.
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Stock and Commodity Market reactions courtesy of Investing.Com, annotations by Mish, snapshot 2:52 PM Central.

Stock and Commodity Market reactions courtesy of Investing.Com, annotations by Mish, snapshot 2:52 PM Central.

Fed Hikes Rates a Half point, the Most in Over Two Decades, Baby Steps on QT

Earlier today the Fed Hikes Rates a Half point, the Most in Over Two Decades.

It was the Quantitative Tightening (QT) and the Q&A session that got things cooking.

QT tightening schedule from New York Fed

QT tightening schedule from New York Fed

 Doubting the Fed's Resolve

This is the most aggressive QT schedule yet. I use the term "baby steps" in relation to the $9 trillion start point and where the Fed wants to go. 

Also, consider this statement from the Fed's Plans for Reducing the Size of the Federal Reserve’s Balance Sheet.

The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps.

The Fed seeks to avoid outright sales. It hopes to reduce the balance sheet by not reinvesting principal amounts. How credible is that?

Fed's Balance Sheet by Duration 

Fed's balance sheet details chart by Mish

Fed's balance sheet details chart by Mish

There will be no refinancing going forward at these mortgage rates. The fed is loaded with over 10-year  duration mortgages. The Fed proposes the impossible.

For discussion, please see The Fed's Quantitative Tightening (QT) Problem in Three Pictures

Finally, I strongly suggest the Fed will abandon QT as soon as a deep recession or credit market event hits.

I have repeatedly made that statement as well as doubting aggressive rate hikes.

How Many Hikes?

Rate hike odds courtesy of CME Fedwatch, annotations by Mish

Rate hike odds courtesy of CME Fedwatch, annotations by Mish

Fed's Credibility and Resolve 

I am not the only one highly doubting the Fed's credibility resolve ahead of this dovish meeting.

Danielle DiMartino Booth provides the color commentary on credibility in An Excellent Video Interview to Watch: Dilemma of the Fed’s Own Making

Jack Farley did an excellent interview of former Fed insider Danielle DiMartino Booth and former Fed QE trader Joseph Wang that's well worth a play.

Key Video Comments From Booth Except as Noted

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  • "Powell eviscerated his credibility by sticking to the [inflation is] transitory narrative.'  
  • "If he wants to harm his credibility even more, he can insist the economy is very strong. he can ride this ship all the way over the waterfall." 
  • "Employment is the most lagging of all economic indicators. "Jay Powell knows that labor being strong, in the face of the second largest employer in the United States, Amazon, announcing that it had built out too many warehouses and it had too many people, and was going to start reducing headcount, his credibility is on the line right now"
  • Towards the end of the interview, Wang commented "My base case is something breaks and the Fed will go back growing the balance sheet."
  • Danielle smiled and nodded. She added "Look, I get it. We've got inflation, but if and when something breaks we could have a massive wave of disinflation. And I think we are actually seeing that now."
  • If something breaks "The Fed will pull the plug on QT immediately,"  said Booth.

Hoot of the Day

  • Reporter to Powell: "Do you think the Fed has a credibility problem?"
  • Powell: "No, I don't .... And I want to keep it that way."

That was from the post FOMC Q&A video that I watched. 

For his performance, and arrogance, Powell wins my Hoot of the Day award by a landslide.

Meanwhile, the stock market ripped higher today, and so did oil.

West Texas Intermediate Crude (WTIC) jumped over 5 percent today to $107.66. Gas prices will jump tomorrow.

Expect a Waterfall

What About Stocks?

S&P 500 chart courtesy of StockCharts.Com, annotations by Mish with thanks to Jeremy Grantham.

S&P 500 chart courtesy of StockCharts.Com, annotations by Mish with thanks to Jeremy Grantham.

The reaction today does not change in the least. We are now in a bear market. This is another Fed-induced bear market orgy that won't last. 

All Powell can do is prolong the pain. How is the jump in crude today in the Fed's (or anyone's) best interest?

Powell would be better off getting it over with. But he won't. And he is clueless about what's coming.

The longer the Fed tries to stave off recession, the deeper it ultimately goes. We are headed for a waterfall event.

The S&P 500 could and probably will decline 50% from the top. And if it does stocks will not even be cheap. 

I repeat my April 22, 2022 message Expect More Stock Market Pain Because It's Coming

By the way, If You Think I'm Bearish Please Read John Hussman

This post originated at MishTalk.Com.

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