Is The Powell Put dead? Maybe Not

Last week a bevy of Federal Reserve officials led by New York Fed President John Williams, "who is one of the most senior advisers to Chairman Jerome Powell and helps shape the policy agenda," in the words of the Wall Street Journal, tried to talk down the market's concern that the Fed is about to ratchet up interest rates aggressively, starting with a 50-basis point hike at its next meeting March 15-16.

"There's really no kind of compelling argument that you have to be faster right in the beginning" with rate increases, Williams said last Friday. "There's no need to do something 'extra' at the beginning of the process of liftoff. We can…steadily move up interest rates and reassess. I don't feel a need that we'd have to move really fast at the beginning."

The 50 bp talk got started by St. Louis Fed President James Bullard, who had said earlier that "the best response to this situation [meaning the recent surge in inflation to 40-year highs] is to front-load the removal of accommodation." That provoked a large selloff in the stock and bond markets. Subsequently, several Fed officials and regional bank presidents, including Williams, pushed back on that assessment, saying that the Fed would take a more measured approach to raising rates. The desired path now seems to be a 25-bp increase at the March meeting, following which the Fed would see what effect that would have before taking the next step. Continue reading "Is The Powell Put dead? Maybe Not"

Can A Dove Change Its Spots?

Thankfully, there is at least one area of U.S. society where people are still allowed to disagree, and that's on Wall Street, where there is a clear difference of opinion on what we can expect the Fed to do this year regarding raising interest rates to fight inflation. What's surprising is how widely divergent they are.

Let's start with the most aggressive, or hawkish, prediction. That belongs to Bank of America.

"Following the continued hawkish pivot at the January FOMC meeting, we expect the Fed to start tightening at the March 2022 meeting, raising rates by 25 basis points at every remaining meeting this year for a total of seven hikes, and in every quarter of 2023 for a total of four hikes," BofA economists said. That would put the fed funds target rate at a range of 1.75% to 2% by the end of this year and 2.75% to 3.00% by the end of next year when the bank expects the rate-raising cycle to end.

"The Fed has all but admitted that it is seriously behind the curve," the BofA research note added. "When you are behind in a race, you don't take water breaks," it said, explaining its aggressive forecast. Continue reading "Can A Dove Change Its Spots?"

Powell Wimps Out

Pretty much as expected, the Federal Reserve last week said that, in the face of rising inflation and a booming economy and job market, it would further reduce its purchases of Treasury and mortgage-backed securities and raise interest rates.

But not yet.

Beginning in January, the Fed said it will be buying $60 billion in bonds a month, which is down 50% from the original schedule of $120 billion a month and its recently reduced plan of $90 billion, announced only a month ago. Which means the program will end next March, as opposed to the original termination date of June, at which time the Fed expects to start raising interest rates unless something happens in the meantime.

The Fed is projecting three 25 basis-point increases in its federal funds rate next year, followed by three more in 2023 and two more in 2024. That would put the fed funds rate in a range of 1.4% to 1.9% at the end of 2023, up from a range of 0.4% to 1.1% in its previous projection in September. The current rate, of course, is 0.1%, or near zero. Continue reading "Powell Wimps Out"

The Battle Against Inflation Begins

There shouldn’t be too many surprises coming out of this week’s Federal Reserve monetary policy meeting. The newly hawkish Fed is likely to formally announce its intention to accelerate the tapering of its asset purchases, as Fed chair Jerome Powell told Congress recently, echoed by other Fed officials so that the program ends sometime around March of next year, rather than several months later, in order to ward off the inflation that Powell now concedes isn’t transitory.

The bigger question is, will the Fed actually be successful in putting the inflation genie back in the bottle? After trying unsuccessfully for more than 12 years to lift inflation past its 2% target, why should we now believe that the Fed suddenly has the smarts and the oft-mentioned “tools” to rein in inflation that is now at its highest level in several decades?

The data-driven Fed has more than enough justification to expedite the taper, which would then lead the Fed to start raising interest rates off zero soon after, rather than waiting until sometime at the end of next year or even 2023.

Inflation

On Friday, the government announced that the year-on-year rise in the consumer price index jumped to 6.8% in November, up from 6.2% the prior month and the fastest pace in nearly 40 years. It was also the sixth straight month that it topped 5%, adding further evidence that the rise in inflation this year is anything but temporary. The YOY rise in the core index, which excludes food and energy prices, rose 4.9%, up from October’s 4.6% pace and the steepest increase since 1991.

Does that sound transitory to you? Continue reading "The Battle Against Inflation Begins"

Ignorance Is Bliss

Are the financial markets not paying attention? Or is that a good thing?

I keep asking myself those questions while I watch the major U.S. stock market indexes soar to new heights on a regular basis, while bond prices retreat – and yields rise – after hitting crisis levels early in the year.

The markets are saying: everything is just fine. The economy is humming along, consumers are spending, everyone who wants one can get a job, but just in case, the Federal Reserve is keeping interest rates low and monetary policy accommodative. How can things possibly get any better?

But are we getting a little too comfortable?

Stock prices are rising, and bond prices are falling even as the main Democrat presidential hopefuls try to top one another with the most profligate government giveaways they can think up – Medicare for All, free college tuition, student loan forgiveness, free health care for illegal aliens, reparations for slavery, you name it – while their peers in the House are trying desperately to drive President Trump from the White House, so they don’t have to face him on Election Day next year.

To say that there is a huge disconnect between the political world and the financial world is a huge understatement.

At some point, will investors look over this depressing – and rather scary – landscape and take their chips off the table? Or do they really believe that all of this silliness will eventually blow over and Trump – whom the financial markets seem to like, or at least are comfortable with – will arise victorious after the impeachment witch hunt plays itself out and the current field of Democrat presidential wannabes thins out? Continue reading "Ignorance Is Bliss"