Reasons to be Optimistic

As expected, the Federal Reserve raised the target for its benchmark federal funds interest rate by 50 basis points at its mid-December meeting, to a range between 4.25% and 4.5%.

That was down from the 75 basis-point hikes at its four previous meetings, yet the market’s immediate reaction to the move was an immediate selloff.

Was that a classic “buy on the rumor, sell on the news” reaction — i.e., the Fed delivered exactly what Chair Powell had earlier indicated it would do?

Or was there some element of disappointment that the Fed, despite the more modest rate increase, included in its updated economic projections that most officials expect to raise rates by another 100 basis points, to about 5.1%, next year?

But was that really a surprise, given earlier comments from Powell and other Fed officials?

On a positive note, according to the Fed’s revised economic projections, it now expects inflation to fall to 3.1% next year before declining in 2024 to 2.5% and 2.1% in 2025, putting it at its long-term target.

In November, the year-on-year increase in the consumer price index fell to 7.1% from 7.7% a month earlier, down sharply from June’s 9.1% peak. So it looks like the Fed is optimistic about where inflation is headed, whether its rate-rising regimen deserves the credit or not.

It's also now calling for U.S. GDP to grow by 0.5% next year, unchanged from this year’s pace, before climbing to 1.6% in 2024.

By way of comparison, the economy rebounded at an annual rate of 2.9% in the third quarter following two straight quarters of negative growth.

The Fed projects the unemployment rate to jump to about 4.5% over the next three years, up from 3.7% currently, due to its rate increases. Continue reading "Reasons to be Optimistic"

The Fed Needs To Practice Patience

It’s beginning to look a lot like 50 basis points.

OK, that’s not as catchy as that more famous Christmas tune. But that’s shaping up to be the likely outcome at the Federal Reserve’s next two-day monetary policy meeting December 13-14.

While inflation has slowed only a little bit since the Fed’s last rate hike on November 2 — its fourth 75-basis point increase in a row – the consensus seems to be that the Fed will moderate the size of its next hike to 50 bps, for no other reason perhaps than to see what effect its rate-raising process has had on the economy.

Indeed, the minutes of the Fed’s previous meeting at the beginning of November signaled such an outcome. “A substantial majority of participants judged that a slowing in the pace of increase would soon be appropriate,” the minutes said.

The Fed has now raised its benchmark federal funds rate by a cumulative 375 bps since it started hiking rates back in March, when the rate was at zero. A 50-bp hike in December would put the fed funds’ rate at an upper range of 4.25%.

While a slight moderation in the next increase will be welcomed by just about everyone, from Christmas shoppers to homebuyers to investors, it’s not likely to be the last, and possibly for a while yet.

That was the word handed down this week by New York Fed President John Williams. While he “did nothing to push back against expectations” of a half-point rate rise at the December meeting, the Wall Street Journal’s headline was more hawkish, quoting Williams as saying that “inflation fight could last into 2024,” meaning more rate hikes over a longer period of time than the market expects.

“Mr. Williams said he expected that rates would have to rise in 2023 to somewhat higher levels” than he had estimated back in September, the Journal said.

If the whole point of the Fed’s rate-raising regime is to try to slow the economy and thus reduce the heat under inflation, you don’t have to be a Harvard-trained economist to see that it hasn’t made that much of a dent so far and that it’s a long way from ending its restrictive cycle. Continue reading "The Fed Needs To Practice Patience"

The Thanksgiving Rally Should Not Be Trusted

The market rally during the shortened holiday trading week of November 21st-25th should not be trusted just yet.

The Dow Jones Industrial Average rose 1.78% during the week, the S&P 500 increased by 1.53%, and the technology-heavy NASDAQ grew by 0.72%.

The move higher came for several reasons, but none materially changed the economy's outlook over the coming six to twelve months.

The biggest news was from the Federal Reserve. The Fed's meeting minutes from their November 1st and 2nd meeting pushed prices higher after several Fed members expressed interest in slowing the pace of rate hikes during future meetings.

Just the fact that the Fed is talking about reducing the amount of their rate increases is significant, and many economists applaud this move. Economists are happy with this because the Feds policy changes have a lag, meaning it takes time for rate increases to show in economic data reports.

The concern has been the Fed is raising rates too quickly, and by the time the lag sets in, the economy will be in the dumps. So, slowing the pace today is a possible way the Fed can avoid running the economy into the ground. Not running the economy into the ground is the "soft landing" we often hear about when people refer to the Fed and its current policies.

Another catalyst for the recent move higher was the Consumer Price Index in October, which was up 7.7% from a year ago. This was the lowest CPI reading increase since January of this year. But, let's be honest, a 7.7% increase year-over-year is still ridiculously high inflation.

However, many economists are actually saying they are seeing inflation leveling out. We aren't yet seeing that happen with the CPI numbers because we are still looking at year-over-year comparables before inflation got out of control.

The true sign that inflation has slowed, or is still climbing, will be in 2023 when we see year-over-year comps comparing current inflation measures with the elevated inflation we began seeing in early 2022. Continue reading "The Thanksgiving Rally Should Not Be Trusted"

Poised for the Fed Pivot

Given its past history, both over the long term and especially more recently, it’s inevitable, if not a given, that the Federal Reserve will screw up. This time should be no different. When exactly this will manifest itself is hard to say, but it may be soon—possibly before the end of this year or in early 2023.

The Fed, as we know well, grossly inflated prices and asset values post-pandemic by sticking too long to an overly accommodative monetary policy, holding its benchmark federal funds level at zero percent as recently as March and continuing to buy Treasury bonds, long after inflation was shown to be a lot more “transitory” than the Fed thought.

Now we are all paying the price for the Fed’s belated realization that it was wrong about inflation, as it has raised interest rates five times in the past six months, to 3.00%-to-3.25%, including 75 basis points at each of its past three meetings, and shows few signs of intending to sit and wait and see how those rate hikes will affect the economy.

In the process, the Fed has basically chucked the second piece of its dual mandate, namely maximizing employment, in order to slay the inflation beast.

The American consumer and investor are thus no better than pawns in the Fed’s game of trying to fix a situation it largely created by itself, yet there is no reason to believe that its current policies are any better or smarter than its previous prescriptions, which involved flooding the financial markets with buckets of cheap money it didn’t need.

Now it’s trying to undo all that in a few short months, all while trying not to steer the economy into the ditch, although perfectly happy to throw people out of work and gut their retirement portfolios.

(Question: If the Fed’s actions will force some people to keep working or rejoin the labor force—and there are still plenty of job openings—doesn’t that work against its plan to reduce employment?)

At some point — sooner rather than later, we hope, but no doubt later than everyone else — the Fed will suddenly come to the conclusion that it’s gone too far with tightening and will start to take its foot off the monetary brakes. It may not start to lower interest rates, necessarily, but at least take a breather and see what effect its recent new-found hawkishness has had on inflation and economic growth. Continue reading "Poised for the Fed Pivot"

The Fed Kicks It Up a Notch

A long, long time ago — 1992 to be specific — the American media howled with derision when then President George H.W. Bush professed “amazement” at a new supermarket bar code scanner, the coverage of which was supposed to demonstrate that Bush was hopelessly out of touch with the daily lives of ordinary Americans.

To its credit, the Associated Press a few days later tried to correct that impression, but by then the rest of the press had moved on and the falsehood has lived on ever since.

Bush’s supposed gaffe at least had no policy ramifications, although the story didn’t help his reelection efforts that year.

The same can’t be said about President Biden’s absurd comments to 60 Minutes last Sunday that inflation is now under control, albeit at more than 8%, the highest sustained level in more than 30 years.

After dismissing August’s monthly CPI reading as "up just an inch, hardly at all," he proceeded to gladly dig himself even deeper, proudly telling the interviewer Scott Pelley that “we're in a position where for the last several months, it [inflation] hasn't spiked, it's been basically even.”

In other words, inflation hasn’t risen to 9% or 10% year-on-year, so we’re in good shape.

This comes on top of other whoppers he and other members of his administration have said over the past several months, such as telling us that the recent student loan giveaway and an earlier deficit-raising budget measure were all already “paid for,” as if there was no cost involved.

Not to mention labeling his most recent budgetary measure the “Inflation Reduction Act.” Talk about Newspeak.

The point here is to demonstrate just how hard Federal Reserve Chair Jerome Powell‘s job is going to be to try to bring down inflation — yes, Mr. President, it’s really high and not getting lower — without any help from the fiscal authorities led by the White House. So brace yourselves for more interest rate increases. Continue reading "The Fed Kicks It Up a Notch"