by Brian Maher of The Daily Reckoning
The announcement came rolling from the Eccles Building at 2 p.m. Eastern…
No rate hike.
Jerome Powell has decided to sit on his hands — for now.
In his very words:
It’s important that monetary policy not overreact to any one data point… The FOMC will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.
That is precisely why the next move will be a rate cut.
We have reckoned lots lately about the inverted yield curve… and the recessionary menace it represents.
The 10-year versus 3-month yield curve recently inverted to its lowest level since April 2007.
Meantime, 10-year Treasury yields hover at two-year lows — 2.04%. One Bloomberg opinion piece instructs us to prepare for 1% yields.
As the old-timers know… the bond market gives a truer economic forecast than the chronically dizzied stock market.
Meantime, the New York Fed’s recession model reveals a 30% probability of recession within the next year.
It last gave those same odds in July 2007 — merely five months before the Great Recession was underway.
JP Morgan places the odds of recession in the second half of this year at 40%.
And Morgan Stanley gives a 60% likelihood of recession within the next year — the highest since the financial crisis.
Yes, the Federal Reserve will soon be cutting rates.
Conspicuously absent from today’s statement was the word “patient.” Thus Mr. Powell telegraphs that he is ready to move.
Federal funds futures presently give nearly 90% odds of a July rate cut.
The market further expects as many as three rate cuts by this time next year — perhaps four.
We are compelled to restate the blindingly obvious:
The Federal Reserve has lost its race with Old Man Time.
The opening whistle blew in December 2015… when Janet Yellen came off the blocks with a 0.25% rate hike.
If the Federal Reserve could cross the 4% finishing line in time, it could tackle the next recession with a full barrel of steam.
Alas… it never made it past 2.50%.
The Federal Reserve cannot return to “normal.”
The stock market will yell blue murder and take to violent rebellion if it tried — as happened last December.
No, Wall Street has Mr. Powell in its hip pocket — as it had Janet Yellen, as it had Ben Bernanke, as it had Alan Greenspan before him.
But it is not only the Federal Reserve…
Last year the world’s major central banks were pledging to “normalize.”
But now they are in panicked retreat…
All have taken to their heels, hoofing 180 degrees the other way.
Both the Bank of Japan and European Central Bank are now gabbling openly about rate cuts and/or additional quantitative easing.
“It’s all in the open now. Front and center. The new global easing cycle has begun before the last one ended.”
This is the considered judgment of Sven Henrich, he of NorthmanTrader.
We must agree.
Yet the central banks have only themselves to blame…
They grabbed hold of the poisoned apple during the financial crisis.
They gulped… and took the first fateful nibble. It proved nectar to the stock market.
Encouraged by the results, they soon munched the full dose… and later went plowing through the entire tainted orchard:
Zero interest rates, QE 1, 2 and 3 — Operation Twist — the lot of it.
Even with trade war raging and recession hovering, stocks are within 1% of record heights.
And so the banks are too far gone in sin to turn back now.
Their greatest casualty?
Henrich on the wages of central bank sin:
Let’s call a spade a spade: Equity markets and capitalism are broken. Neither can function on any sort of growth trajectory without the helping hand of monetary stimulus. Global growth figures, expectations and projections are collapsing all around us and markets are held up with promises of more easy money, in fact are jumping from central bank speech to central bank speech while bond markets scream slowdown.
We fear Mr. Henrich is correct.
We further fear capitalism will get another good round pummeling in the years to come…
The Federal Reserve’s false fireworks will land as duds against the next recession.
Cries will then go out for the artificial savior of government spending — Modern Monetary Theory (MMT).
Free college tuition… universal Medicare… jobs for all… a $15 minimum wage…a possible Green New Deal…
These and more will be in prospect.
Politicians will go running through the Treasury as a bull runs through a china shop… and leave the nation’s finances a shambles.
Only then — too late — will they discover that debt and deficits matter after all…