The market reaction to yesterday’s FOMC meeting was decidedly dovish. The notion the Fed will get in another rate hike just went out the window.
Yesterday, some analysts described the FOMC meeting as hawkish but that was not my interpretation. Analysis of futures positioning suggests the same thing.
Fed’s Bias is Hold, Not Hike
At the FOMC press conference yesterday, Powell stated “The Fed is not thinking about rate cuts right now at all.”
That seems hawkish, but the market perceived otherwise, and I concluded the same thing yesterday as well.
Look at the huge stock market jump and collapsing bond yields today as further evidence.
Hawkish Interest Rate Hold by the Fed?
Yesterday, I commented A Hawkish Interest Rate Hold by the Fed or Something Else?
Reporters kept trying to get the Fed to commit to more hikes or more cuts with a barrage of similar questions, but Powell ducked them with variations along the lines of significant tightening has taken place and we will wait and see.
Hold Bias, Not a Tightening Bias
I watched the entire press conference and do not see a tightening bias.
I see a stated hold bias.
The market interpreted Powell’s repeated mentions of significant tightening already as a dovish statement.
Unstated Bias
There is always a stated bias and an unstated bias. The unstated bias is the Fed will do whatever it wants and make excuses for it. If the market does not react the way the Fed wants, a barrage of Fed governors make speeches hoping to clarify.
Fed Uncertainty Principle
Doing what it wants regardless of data is the essence of my 2008 post on The 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 several major asset bubbles and wanted to make up for lack of prior inflation when it does not even know what inflation is.
Now the Fed gives forward guidance on their thinking and all the banks and hedge funds front run the guidance which explains the collapse of Silicon Valley Bank.
For discussion, please see The Fed Admits a Mistake in Collapse of SVB, Seeks More Power Anyway
Need for Higher Inflation
Fed bias led to massive QE that fueled inflation the Fed could not see. Nor could the Fed see the inflationary aspect of three massive rounds of stimulus. The Fed failed to see huge inflation in front of its nose because it refused to see it.
Right or wrong, the Fed does not want to either hike or cut. That may be the right policy or not, but it appears to be both the stated bias and the unstated bias.
Despite preaching data dependence, the Fed has bias dependence. If wrong, it’s likely to be very wrong.
How the Fed Destroyed the Housing Market and Created Inflation in Pictures
The Fed does not consider housing bubbles or asset bubbles as inflation. I explained the result in How the Fed Destroyed the Housing Market and Created Inflation in Pictures
Holding clear biases is a huge part of the Fed’s problem. But an even bigger problem is the Fed does not have a clear understanding of what inflation is.
The results speak for themselves.
Tue starts the election year. Rates don’t go up in such years, they go down. Carter allowed an exception, carter lost, a lesson not lost on second term wannabes.
Biden’s handlers (the Neocons) need war for any hope of winning the election. Wars are inflationary.
The over-indebted establishments around the world need war to mask/distract their populations for the coming defaults and establishment of traceable CBDC’s. War is inflationary.
The WEF wants war to impose the Great Reset and their Communist agenda. Wars are inflationary.
The Fed cannot control the collapse in confidence, which produces civil wars and world wars, and the Fed cannot stop war, especially since their money-centered banks finance wars.
Everyone aware of the changes that have been quietly made over the last 50 years?
https://mpalmer.heresy.is/webnotes/TheGreatTaking/
The above link is to a free, short book about how you will be stripped of your assets. Plan accordingly and good luck!
The majority believes the Fed controls markets, but in reality they are followers of the Invisible Hand. While the Fed controls short-term rates, and attempts to provide liquidity during a crisis, it is powerless to control confidence, which ultimately, will destroy the dollar empire.
The Fed’s hawkish policy is upside down, as we don’t have a demand problem. The problem is supply and war. The current pause is nothing but an opportunity to salvage the all-important holiday spending season, which will prove to be a bust, as real inflation is hurting the consumer. AND DON’T FORGET, the cycle of war has just started, which is the big driver of inflation. The Fed is not done raising rates because inflation if far from over.
Very confident post. So how are you profiting from your knowledge?
Mish, the “MARKET” never knows what it is talking about. THESE ARE TALKING HEADS, “talking their books.” I am surprised at you for being somewhat naive about the TALKING POINTS of rates. THE MARKET EXISTS to extract as much money out of the PLEBS as possible.
By saying that you agree on RATES means that you are into the same “guessing game” as the NINCOMPOOPS on CNBC and BLOOMBERG, who are NARRATIVE PURVEYORS at best.
Anyway, let’s say that I agree with these idiots. “NO MORE HIKES.” SURE, but THEY DID NOT SAY THAT RATES ARE BEING “PIVOTED” in the near term.
This means that these HIGH RATES (NOT HISTORICALLY, I paid 12% Mortgage Rates long ago), but HIGH FOR LONGER IS A FAR DIFFERENT way to be more accurate and this PAIN will continue for people with variable rates, credit card debts, etc.
We are entering RECESSIONARY FORCES territory and everyone knows this intrinsically, and WE all know that the Government Concocts lies for Voting purposes but let’s get real: RATES ARE at 15 to 20 year HIGHS, right (don’t count on my Memory, but Rates have been so low as this is what has caused MARKET distortions and these MARKETS are not ready for enduring Rates as I am saying here.
Good thing that you are here to explain all that.
Now, I want you to explain how you have made a fortune, using this knowledge of how things actually work. Because, what good is this knowledge without taking advantage of it?
And most importantly, how and what you are invested in for the future that you are so confident about. Because I would like to learn from you.
My reason for being here is to learn how to keep increasing my wealth.
You sound like someone who must already be very wealthy and can help me.
Thanks.
Well Mish, I was surprised to wake up this morning and find all the bond funds I have invested in enjoyed large gains while I was asleep. (I am in Bangkok). Still down on TLT, but the others are back to breakeven, or in the green a little. It does look like Mr. Market is telling us the rate raising party has ended.
What he really said was I don’t know. Look at commodities blast off. Lumber up almost 3 percent today
Medicare and Medicaid consume 40 percent of the federal budget. If these costs are not addressed it does not matter what the federal reserve does.
It’s not up to the Fed anymore, they lost control. They have been reduced to just trying to predict what the market demands. This to give us the illusion that they are still in control. Outside of that, their influence is intermittent at best.
Inflation causes depression.
In a free market depression tempers inflation.
In this feudal economy, only more inflation can sustain it’s absurd constructs.
Even interest hikes become inflationary.
A generous dole is needed to sustain the growing peasantry it forms.
This is not compatible with democracy as it’s form of government.
No one knows what it will lead to this time, but history provides numerous examples of where it has gone before.
Have been reading Peter Turchin’s book End Times?
Elite overproduction (too many managers in government) together with popular immiseration (asset stripping the general population) leads to serious civil strife.
George Friedman, Strauss and Howe, and Turchin are all predicting an exciting decade.
The Fed didn’t do anything to the market the market wasn’t already doing to itself. Bonds were in a consolidation rally that started about 2 weeks ago. The 3+ year bond selloff looks like it has 2-3 months to go before a year-long rally begins.
Stocks were near the bottom of a possible 4th or D wave of a larger degree of trend that started at the October 2022 lows. Prices were poised to make a sharp move one way or the other. There is a very good chance the market makes a new all time high in the next 2-4 months before a severe bear market starts.
Timeframes on both stocks and bonds indicate a major rotation from stocks to bonds is about to take place.
They are certainly being pushed, and certain Unions, and States, Pension Funds are looking for a place to safely hide out and have some Time to recoup. Plenty of money in those combined coffers to move the needle!
Problem is, losses may have to be taken to do so, and that may not be feasible, but needed just the same. We may (have to) see some NEW accounting rule changes, or money jumping around in which seems weird, but meant to help soften the blow.
Only Time WILL TELL…
no a shot in hell is the fed done. we had 40 years of declining rates. we are more situated now like the 1965 to 85 period. sure the fed might pause and even screw up and lower rates for pure politics or pressure, but this new cycle is a long way off and it will come in waves……..
I said I figured the FED was done in this forum months ago.
I’ve also been saying I’m concerned the FED wasn’t factoring policy latency if they continued raising, the true effects of 2022’s rates hikes are only just now kicking in.
Gdpnow is down to 1.2%, maybe we will finally get a slowdown or perhaps even the most widely anticipated recession in history.
I thought the top was when banks paid interests on savings account above inflation, whatever that is. Sure you can get it on CDs, but where is the 5% on savings account? I know, that’s another one for the history books.
Maximus,
Rates are at 5%, even higher but it’s high yield savings accounts not standard savings accounts. Good place to park coin for costly home repairs or just a rainy day fund where you can access it in 48 hrs.
One of my HVAC units died but the summer is over. I’m getting 5.05% in my high yield. The wife wants to get the unit now but trying to explain we do not need it now and we lose money getting it now….albeit not much but still. A few years ago sure. The high yield was barely over 1%. Regular savings a big 0.
If they are genuinely pausing on interest rate increases, especially given the gargantuan federal deficits and prospects for war, the FED must be seeing nightmarish data on the economy.
Burry, Ackman, Dalio, and Cohen seem to agree.
Fascinating post. Thank you.
Interest rates are going back to zero. Likely as soon as Biden’s second term (the sign of a successful president) is certain. He needed the higher interest rates (temporarily) to get the old folks who used to live on CD interest to vote for him. Once that 2nd election is done, and considering that the Federal Govt, most state governments and most businesses CANNOT service debt at 5%, the rates will come back to earth, to their new normal, of zero percent.
I’m not sure about going to zero but the government does want rates lower. Inflation isn’t a problem for a borrower. Especially when the borrower gets to calculate the inflation rate and use this to index entitlements.
Indexing entitlements at half, or one third, or one quarter of the rate of inflation is very little help when compounded.
If inflation picks up they wil be forced to raise rates. Inflation may stablize for a bit but will pick up most likely due to wage price spiral and stickly or rising oil prices. Once inflation starts it has a strong tendency to keep on going for a long time.
Inflation is still high. They will adjust the figures to show inflation lower, Just as they are doing now and showing the medical inflation is down.
Borrowers need low rates and government is the biggest borrower.
So if I read that chart right, the expectation is for interest rates to be 4.5% in December of 2024 (end of next year).
I wonder if that’s long enough to blow up some of the real estate funds (Blackrock and others) who are investing in residential and commercial properties?
I took a quick look at Blackrocks real estate fund and it’s been returning 3-4% over the last 3-5 years. That’s not an incredible rate of return but compared to the Fed fund rates of 1% or less, it looked like a great return on a low risk investment (real estate land lording with rising underlying property values). But now in a world of risk free 5% returns (TBills), why would anyone remain invested in a fund that’s only generating 3-4% and carries risk (possible real estate downturn on underlying properties plus the added issues of being a landlord)? If redemption’s start pouring in as investors flee to safer havens then these types of funds will be in big trouble because real estate isn’t anywhere close to being as easy to unload as stocks/bonds. And Blackrock isn’t the only institutional real estate investor these days.
At some point it seems to me that a bunch of these funds are going to be force to unload properties into a very soft market which should then start the price drops in real estate values.
Listen very acutely and dance very close to the chairs.
Great analogy! Thumbs up.
That is what is going to happen once people realize that rates are not going down for as long as one can see. The bubble-blowing days are over. Even the Fed has realized that the ultra-low rates for a couple of decades was very harmful overall and did not create wealth nor preserve it. It just redistributed it to those who need it least.
Surely you don’t think the Fed actions were bumbling, Stooge-like incompetence.
If the Fed didn’t perform as the member banks wished then there would have been changes in policy long ago. As Mish has written repeatedly, those with first access to the ‘money’ benefit greatest from Fed actions – as you observe, that happened to be those who need largess the least.
When the Fed reversed policy and started to seriously raise rates at the fastest clip ever, that was the sign that the Fed had “woken up” to the inflation danger. The second danger tied to that one is the asset bubble which caused everyone with a house and apartment see their net value rocket upward but unfortunately at the same time their cash-flow vanish. We now have a lot of people who are asset rich but cash-flow poor when for everybody it would be better to have assets less valuable but have better cash flow. Real-estate is dead money period. Cash flow is what determines prosperity whether it is for an individual or a nation.
Let’s just hope the FED’s less “transient” on the flip side.
Doug, rates are proportional to debt.
Rates have consistently dropped since 1980, at the exact same time household debt to income has doubled & government debt to GDP has tripled.
This is the result of fiscal policy & globalization’s effects on wages / labor demand over 40 years.
Rates cannot stay high until debt is reduced and gov revenues / mean wages increase to offset higher service costs for existing debt.
.
With the deregulation of interest rates, the banks garnered a larger proportion of personal savings. Since banks don’t lend deposits, the velocity of circulation dropped. The decline in Vt, or the decline in AD caused the drop in interest rates.
Today, this phenomenon has been reversed during C-19. There’s been a tectonic shift in the demand for money.
Does it really matter what the Fed does?
or
Does it really matter what the Lenders do?
At this point with rates around 4.5% it doesn’t seem to matter at all. You see the Banks/Lenders are in trouble, and without the Fed’s help, they can’t lend at rates that low and survive, so up, up, and away they will go. They may even have to stay there long past things seem to be over…
A return to normal is what you are saying.
If your stating normal as in under these conditions, what will occur moving forward, than absolutely!!!
Normal isn’t coming back, Jesus is!
Amen!
The world has changed, and it’s not for the better.
This is a test.