If Warsh and the Fed really want to establish credibility and independence, they will hold this week and thereby notify the market that Fed Funds Futures don’t control their decisions.

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Remember – the FED has 2 mandates! Not one – but TWO:

1. Maximum employment – support the highest level of employment the economy can sustainably maintain.

2. Price stability – keep inflation low and stable; the FOMC considers 2% inflation over the longer run consistent with this goal.

Currently, job creation runs at 1/3 of the run rate going into the Recession in 2001 – in a labor force which today has 18% more workers than back then.

The long-term unemployment rate today is 2.5 times higher than in 2000 – and people are on average unemployed more than double as long today – as back then.

Inflation – both CPI and Core CPI are lower today.

And that was 1 month before the economy fell into a Recession – and inflation collapsed.

Now compare to 2007 – and the picture is the same!

Rate hike? Really? Is nobody awake??

The Fed may be on the verge of a serious mistake, prominent economists warn

Some economists are calling on the central bank to wait before raising interest rates, out of concern the economy may be vulnerable beneath the surface

Investors on Wall Street and observers of the Federal Reserve in Washington largely expect the central bank to raise interest rates when it meets this week, but some prominent economists are warning that such a move could prove to be a mistake.

They see the economy as more vulnerable to a steep slowdown in growth than commonly believed. The Fed’s job is to keep employment steady and inflation under control. If central bank officials raise rates on Wednesday, the goal will be to cool inflation. But these economists worry that a rate hike could cause a sharp cut in economic activity, which could prompt businesses to let go of workers and ultimately lead to a recession.

U.S. 3-month bill yields are surging ahead of the FOMC, now back above 4%.

The market increasingly looks like it is preparing for a 25 bps Fed hike.

Japan is also expected to raise rates by 25 bps this week.

That creates an interesting problem.

If:

Fed +25 bps
BOJ +25 bps

then the U.S.–Japan rate differential barely changes.

From the carry perspective, the game moves nowhere.

For a meaningful change in the yen-funded carry structure, one central bank eventually has to diverge from the other.

And if Japan fails to do that, it cannot keep selling Treasuries forever just to buy time.

Eventually, it may be left with one option:
panic rate hikes.
We are moving from a world defined by panic rate cuts to one where panic rate hikes could become the new policy response.

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