The key words at the FOMC press conference is “uncertain” for good reason. The Fed doesn’t know what it’s doing.
In the FOMC Press Conference, Fed Chair Powell said “uncertain” eleven times. The word guess came up 6 times, some of them by reporters. Here’s an interesting example.
CHAIR POWELL. So I guess it’s fair to say that the economy has been stronger than many expected, given what’s been happening with interest rates. Why is that? Many candidate explanations, possibly a number of them make sense. One is just that household balance sheets and business balance sheets have been stronger than we had understood, and so that spending has held up and that kind of thing. We’re not sure about that. The savings rate for consumers has come down a lot. The question is whether that’s sustainable. It could just mean that the date of effect is later. It could also be that for other reasons the neutral rate of interest is higher for various reasons. We don’t know that. It could also just be that policy hasn’t been restrictive enough for long enough. And there are many candidate explanations. We have to, in all this uncertainty, make policy, and I feel like what we have right now is what’s still a very strong labor market, but that’s coming back into balance.
Hoot of the Day
There’s lots of explanations, and some of them may even make sense.
Actually, it’s good that the Fed is uncertain because their expectations have not been close to the mark for a decade.
The above chart is particularly amusing. The Fed has only a 70 percent confidence level that interest rates three years from now will be in the range of of 0 to 5.5 percent.
That means the Fed expects that 30 percent of the time, rates will be outside that range.
From 2012 to 2019 the Fed kept producing interest rate charts showing hikes that never happened.
Then the Fed decided it was necessary to make up for lack of inflation.
Need to Make Up For Lack of Inflation
St. Louis Fed James Bullard “It would take a decade of above 2.5 percent inflation to make up for 5 years of shortfall“
At these press conferences, no reporter ever asks tough questions about blatant stupidity like that.
Fed Suddenly Less Certain
Uncertainty didn’t just widen, it exploded.
With that, let’s review one of my favorite posts ever, The Fed Uncertainty Principle, written April 3, 2008.
That was before the collapse of Lehman and Bear Stearns and all the hell that ensued.
Recall that Fed Chair Ben Bernanke denied there was a housing bubble.
Fed Uncertainty Principle
The Observer Affects The Observed
The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.
The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.
Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.
Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
The Fed has blown two major asset bubbles, never saw recession, and wanted to make up for lack of prior inflation when it does not even know what inflation in.
Now they give forward guidance on their thinking and all the banks front run it, which partially explains the collapse of Silicon Valley Bank.
For discussion, please see The Fed Admits a Mistake in Collapse of SVB, Seeks More Power Anyway
Here in Colorado the State licenses CPAs (me), drivers (me), plumbers, electricians, the person who cuts my hair, doctors, dentists, etc, but not economists. I am a CPA (license to prove competency), driver (license to prove competency), motorcyclist (license to prove competency), and economist (no license needed).
RRP provides good collateral in the o/n market to the regional banks and the shadow banks. The Fed drained the o/n market. It might lead to a sudden credit crunch.
The FED’s accounting is wrong. Just like Mutual Savings Bank deposits were included in the money stock from 1913 to 1980.
See: Toward a More Meaningful Statistical Concept of the Money Supply
Leland J. Pritchard
The Journal of Finance
Vol. 9, No. 1 (Mar., 1954), pp. 41-48 (8 pages)
re: “But we are attentive to signs that the economy may not be cooling as expected.”
link to federalreserve.gov
Contrary to the FED’s spurious accounting, the draining of O/N RRPs increases the money supply. Retail MMMFs shouldn’t be included in the money stock in the first place. The Austrian economists get this right. So, the FED calls it a liability swap.
That’s subterfuge. Case in point, the O/N RRP facility. Aug, 9 WSJ:
“In their Aug 6. letter in response to our op-ed “How the Fed Is Hedging Its Inflation Bet” (Aug. 2), John Greenwood and Steve Hanke argue that the Fed’s sale of a trillion dollars of reverse repos does not in and of itself reduce the deposit liabilities of banks and money-market mutual funds, and that the money supply is unaffected. By that logic, none of the monetary tools of the Federal Reserve Bank would affect the money supply.”
It’s all fool’s gold my friend. Contrary to Powell, banks don’t lend deposits. And all bank-held savings are derivative. Bankers simply pay for the deposits that the system already owns.
The FED is really screwed up. Their accounting has become worse over the decades. Savings are only invested if there’s a turnover of money, an exchange in the ownership.
The conventional wisdom is that the banks lend deposits. But bank-held savings deposits have a zero payment’s velocity, as banks always create new money whenever they lend/invest with the nonbank public. It’s just too hard for economists to fathom that bank-held savings are not synonymous with the money supply.
My graduate studies in control systems lead me to believe the Federal Reserve’s control system is flawed due not to the Heisenberg uncertainty principal, but to having far too few levers to pull relative to the system states being measured. One lever cannot linearly control every category of data feeding the inflation gauge. The Fed would need at least one lever for every category, but then there would be no free market. Complicating the nature of the problem is the non-linear / coupled nature of the system under study. Compounding the problem is the economy is time varying, people’s desires change over time as to what to purchase on credit and how much to borrow. Let’s also throw in the fact the system is naturally unstable.
The nature of state measurement lacks sufficient accuracy. Decisions are made with present data that later is revised. The delay in using data introduces feedback lag. Too much lag can lead to system instability. If data is sampled slower than the fastest dominating frequency (Nyquist sampling rate / Shannon sampling theorem), then the feedback loop can go unstable, or blow bubbles in finance terms.
This type of problem falls in the expertise of a control system engineer with a PhD than an economist with any sort of level of college education.
Ironically supply and demand make the perfect feedback loop and is all that’s needed for interest rates to be set correctly.
The economy is being run in reverse. Contrary to popular belief, banks aren’t intermediaries between savers and borrowers. The influx of the Keynesian economists in the 60’s changed everything. Keynesian economists don’t know the difference between money and liquid assets, viz., the Gurley-Shaw thesis.
Those Ph.Ds. don’t know:
#1 the difference between the supply of money & the supply of loan funds,
#2 the difference between means-of-payment money & liquid assets,
#3 the difference between financial intermediaries & money creating institutions,
#4 that interest rates are the price of loan-funds, not the price of money,
#5 that the price of money is represented by the various price (indices) level.
The U.S. Golden Age in Capitalism was where savings were “put to work”. I.e., the nonbanks grew much faster than the banks making Walter Wriston jealous. And the ABA is the most powerful oligarch.
According to Corwin D. Edwards, professor of economics, [Edwards attended Oxford University in England on a Rhodes scholarship and earned a doctorate in economics at Cornell University. He spent a year teaching at Cambridge University in England in 1932. He taught at New York University in 1954, the Chicago School from 1955-1963, the University of Virginia, and the University of Oregon from 1963-1971.]
The U.S. Golden Age in Capitalism was driven by “increased money velocity which financed about two-thirds of a growing GNP, while the increase in the actual quantity of money has finance only one-third.” In other words, today, the ratio of the money supply to GNP has drastically fallen.
No one has a crystal ball that tells them the future. Not me. Not Mish. Not the Fed.
I do not expect the fed to be certain about the future, just as I don’t expect anyone else to be certain.
Yet many people spend a lot of time deciphering every word that the fed issues; every statement; every dot plot; and then they are surprised when the future unfolds differently than what the Fed expected.
Which is why I don’t pay much attention to the fed.
Ha. Everything up to 1981 was predicted in 1961. Everything up to the GFC was predicted in 1980.
Where Fed policy front-runs markets by ~1.5 years and stocks front-run the economy by 6-9 months, I wager that regardless how much it sounds good to call the Fed a buncha idiots around a group of Fed haters, the Fed already knows this.
Months back, based on this logic, I said the Fed was going to either pause or slow rate increases, despite many commenters here saying they were going to keep doing .75%.
Go figure, that’s what they did.
Factoring raw long-term mean reversion of the SPX, the Fed will either sit tight until stocks/commodities cool down to mean reversion or we have a nasty 30% crash, at which they’ll cut again.
If I were Jpow, I’d actually maybe cut back ,25 now, in light of how rapidly the job market’s drying up, again, the massive increase in rates over the last 18 months is residual, we’re only just starting to see the effect now.
JOLTs is already dropping fast, all but oil (thanks to Putin & MBS) are coming down and the Fed knows this is residual, even in Jpow talks tough to appease the Fed haters, I doubt rates go up much, if at all, from here.
Bill Ackman says there will be one more hike, he’s a hell of a lot better at this than me, but I stay put, I think they’re done.
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The S&P 500 dropped by about 30% in March 2020 and 21% in October 2022.
The S&P 500 is up about 30% since February 2020, but inflation is about 25% since February 2020%.
So the S&P 500’s real return is 5% over the last 2.5 years :-/
So assets as far as stocks have not been overheated.
PCE and CPI continue to trend down. Let’s see how they fare versus unemployment rate, labor participation rate, and tax receipts. Maybe it will not be such a hard economic landing.
Might I suggest, Mish, that you invite Prof Steve Keen to contribute to a one-on-one Interview to explore HIS clarifications of how Macro-Economics works – – in reality, compared to the Mainstream Economics taught in Colleges (a frontal Lobotomy of BULLSHIT ECON).
Keen would make for an excellent choice as a contributor in the field of this topic! He is brilliant IMHO!
“I did not make love to THAT woman.” Clinton may well have been telling “a truth” but in my Wife’s Book, having ORAL is having SEX.
Thus, truthiness is a funny thing. The Fed is saying that they are “data dependent” and WE HERE all know that the data are flawed, misconstrued, fishy, obviously are lies, and are in the end only HEADLINES to push RETAIL investors in at highs while the sharks are DUMPING shares.
A lot in that above Paragraph.
Allow me one more observation: When they say, “OUR TARGET IS 2%” – – that is a headline which takes out fuel and food, but let’s STILL go with it.
FIND ONE OF YOUR NEIGHBORS and ask them: “do you want the goods that you buy to be 20% more in 2033?”
It they say, “yes” then your neighbor may well be Chairman Powell.
But, if he or she is a pedestrian, they are lying if they say that they want everything to cost 20% more in 10 years.
It’s very easy for them to be “data dependent” when they set the parameters of the data. Notice how the data always changes, as it’s really what I call “Floating Data” that gets manipulated as required, to meet the data figures to coincide with the data dependent numbers. One big show, like circus clowns…
I agree about HEADLINES which are another animal all together, but to manipulate thought and therefor actions. So combine the manipulated data to match the manipulated headlines and Bam! You match right up to make your choices on what to invest in for example. They often make what looks good at that moment, the one they are dumping at that moment, so I definitely agree with you!
“OUR TARGET IS 2%” is indeed another manipulated headline to meet the needs of the data. Notice how what’s included shifts with cost and needs of those items. Again to manipulate the numbers, or caress them into what Story you Need them to reflect for manipulative purposes.
I think it used to be called A Scam, but I digress…
2% inflation won’t make things 20% more expensive in 2033. You forgot to compound it so it will be nearer to 25% increase.
Besides I’d be happy to accept paying 20% more in 2033 as odds are inflation will be much higher than 2%, especially with foreigners dumping bonds and USD reserves. So if you are lucky there will only be 100% increase in prices by 2033.
1) In 2019 the Fed was losing power, but covid was an opportunity not to be
missed. When the economy was comatose the Fed raided in repetitions to
transfer money to small businesses and the poor, but shockingly consumers
and companies cash in commercial banks tripled from $6.8T in 2008 to $18T.
Heisenberg bs. The Fed should have studied Systems Control with a feedback
loop.
2) Bidenomic feeds the System Control with additional trillions. The pour house is uncertain. The Irish gang might give Biden a last chance for Xmas.
3) In 2024 the feedback loop might flip from positive to negative : strikes, earnings,
layoffs, gov diet, oxygen to Biden brain.
4) SPX 1M, option #1: Oct flip down. SPX peaked in July 2023, a lower high.
Option #2 : the hangover cont in Q4. Jan 2024 might be red. A flip possibly in
Feb. Traders uncertainty is high. VIX 1W : last week VIX closed Feb 10/18 2020 gap and popped up.
I believe the reason for their guidance is because of one factor—future war. They know rates and inflation rise in war time. They also know the US is itching for a war with Russia. That is what it means by their “international concern” comment.
“I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.”
I read the other day that there have been a couple of Hindenburg Omens. They aren’t always accurate, but they do pop up when the market may go south.
Or, more simply: “There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.”
Stu, with all respect, it sounds like you’re 90% of the way there. Why have this meddlesome observer at all?
This additional bit of snark isn’t directed at you, but I can hear people saying, but, but, but what about emergencies? I’d argue the emergencies since the Fed’s creation largely exist because of them.
I agree, but will they ditch the Fed? I don’t think they will or even can give up the Control of Rates to their liking. The Fed is a tool for them to use for manipulative purposes only. They don’t care to understand the dynamics of interest rates on society, as it isn’t used for that purpose, quite obviously.
My thinking is that if we are not allowed to remove the Fed, then at least put in place rules or milestones, or some way to manage the atrocities that they are committing.
I guess I am thinking with a clear instructed path to the decision making process, they would be forced to stay on point/topic more than they are freewheeling today as they see put, with no push back, or way to show how they misrepresent themselves. This would at least set some guidelines that have to be followed, or get called out on them and removed from their position. It would be a step in the right direction to eventual removal of the role, once multiple mistakes are made. Perhaps…
Agree with everything you say there. Certainly a more pragmatic and realistic approach than mine.
Keep an eye on the Argentine election coming up. The Milei has said he will dismantle the central bank. He is making the case to peg to the Dollar. Not ideal, but at least a slower sinking ship than what they have now.
“If you can’t dazzle ’em with brilliance, baffle ’em with bullshit.”
What I would do:
– Remove the Top 5 Tiers of the Fed
– Remove All Top Management Throughout
– Insist on Immediate “Free Market Principles”
– New Fed Motto: We will Follow with Clear Data Readily Available, by Multiple Across the Board Sources. The Free Market Will Dictate Our Actions at the behest of Being Removed from Office; If We Do Not Follow “Free Market Principles”
“No, I didn’t quite catch that Lou.”
For over 40 years the Fed has been the easy way out for a government that’s owned by the donor class.
For any politician –
Raise taxes on the wealthy, you’re out of a job.
Force the healthcare / pharma sector to trim prices, you’re out of a job, despite the fact that 45% of it is paid with tax dollars.
Regulate anything that could hurt profits (opioids, oil/energy, financials), you’re out of a job.
In 40 years, D.C. has opened the flood gates to globalization, decreased to taxes to the wealthiest while at the same time the global labor pool has diminished labor demand and wages as a result.
Household debt has doubled in that 40 years, government debt has more than tripled.
The Fed has been there the whole time to reduce rates to free household disposabl4e income.
Until something is done to delegalize bribery (“Money is free speech”) this cycle will not stop.
The Fed will remain the only tool we have to keep us from third world status, solely by making-ever increasing debt cheaper when we need to claw back from recession
Don’t hate the band-aid, hate the knife.
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This cycle will stop when the shtf. Need a political candidate who points that out. Vivek is the only one I’ve heard mention this
What I meant was he pointed out that our politicians are bought and paid for by special interests
You’re saying a candidate, running for office, is saying what you want to hear?
Welp, he’s got my vote!
No need to vet his campaign donors (Pete Thiel buying s’more tax cuts), nor ask why a billionaire pharma CEO wants a $500K job, or what he gets out of it, no, he said something about corruption, he gets my vote.
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Me:
#1: The Fed has no idea about what it should or shouldn’t do about the Economy and/or Banking. Only a free market can lead the way to proper decision making, when one feels the need to Consider Changes.
#2: The Fed, which did create nearly all of this, by not using and/or giving up the power to be truly unbiased and unweighted in scale. When you are as inept as the Fed is at there Jobs, the only way to Hold Onto Power is to Seize More Power and/or Become More Dictatorial
#3: When has the Fed ever Learned and/or not repeated past mistakes.
#4: The Fed simply does not care about anybody but themselves and their little Body of Power that they bath within. Nothing less, Is or Will Be, Acceptable!
My agreement with you Mish, but in my own words…
“Actually, it’s good that the Fed is uncertain because their expectations have not been close to the mark for a decade.”
Mish, you give the Fed too much credit!