Federal Reserve Chair Jerome Powell placed his put in stocks while saying there is none. When he doubled down today on a more dovish approach to the economy, Powell claimed the Fed is not designing interest rates to keep the market climbing. If that is true, recession must be near:
Fed delivers a “double-barrel dovish blast”
The Fed sees recession dead ahead. You have only that choice in how to interpret this because the Fed made a major course correction in late December, which instantly saved the crashing market, and today it announced it fully intends to stay the new course while stating that had nothing to do with the market.
The Fed’s major course change, then, can only be due to seriously deteriorating economic conditions. The course shifted from an expected 3-4 increases in 2019 of its targeted Fed-funds rate to 1-2 interest increases; and it shifted its balance-sheet-reduction from auto-pilot at full speed to manual pilot under a careful speed watch. Today it doubled down on all of that.
If such a face-losing change of course is due only to economic data, the Fed has surely put us all on economic watch (sort of like hurricane watch or storm watch). After all, auto-pilot was supposed to be as boring as “watching paint dry” according Janet Yellen when she started us down that path.
The myopic market loved this today, and the Dow leaped instantly up about 150 points to close 435 points up for the day!
The Fed’s wording was that it will remain “patient” as it makes “adjustments” to its interest targets and abandons autopilot. Most analysts I’ve read assume that means one future hike this year, while some think it means none and others it means two; but all agree it is well short of the four that were priced in last fall before the market plunged into a bear market. So, the market repriced today to the new reality just as its been repricing since this announcement was tested in December.
“The Fed delivered this double-barreled dovish blast while still assessing that the economy is ‘solid’ – only a slight downgrade from ‘strong’ in the prior statement – enhancing the boost to risk,” said Krishna Guha, head of global policy and central bank strategy team at Evercore ISI.
Oh, then it was to save the market! What else could it be if the economy is “solid?” “Solid” is solid, right? After all the Fed said its economic gauges show …
- Economic activity rising at solid rate.
- Jobs staying strong.
- Labor market continuing to tighten with unemployment remaining low.
- Consumer spending growing strongly.
- Core and headline inflation remaining near 2%
Fedspeak is Doublespeak
Here is what was really behind Powell’s words, a concern he voiced long ago:
Earlier this month, when the Fed released the full transcripts from its 2013 FOMC meetings, there was one particular moment of epiphany by now-Chair Jerome Powell, when he unveiled [back in 2013] what the markets have known all along: that the Fed is hostage to the market’s every whim, to wit:
“…The idea that President Kocherlakota said and Governor Duke echoed— that we ’re now a captive of the market — is somewhat chilling to me.
The idea may have been chilling, but unfortunately for the Fed, it’s absolutely accurate, and it’s a fact which traders once again confirmed earlier this year when after the S&P’s near bear market tumble, Powell caved and reversed his formerly hawkish stance.
Fourth-quarter 2018 corporate reports have also been generally positive this month, and stocks are soaring. Powell knows this market rally happened because of the Fed’s sudden dovish turn in December since the market experienced immediate salvation when the Fed pivoted. Everyone knows that is what turned the market around — well, that and help by the banking system’s plunge protection team. Powell clearly fears that fragile salvation will fall apart just as immediately if he were to say anything less dovish, so he went full dove dive today, forcing himself to publicly deny the reality he finds chilling — that the Fed is captive to the market.
The only other reason it would make such a deliberate move that it knows will be seen as being captive to the market would be that it sees big trouble on the horizon for the general economy (now “stable”) … if the Fed were to continue the course it set last fall.
Take your pick — captive to the market or big trouble dead ahead — but either way, the Fed is sharply correcting course (or talking about it) sooner than I thought it would. The sudden change confirms my refrain over the years that the Fed will discover it can never unwind its balance sheet without crashing its fake recovery. I’ve also maintained the Fed’s balance sheet unwind is a bigger problem than the Fed’s interest targets.
The question remains — since this is still talk at this point — will the Fed actually stop unwinding its balance sheet in time to avert the disaster the Fed, itself, has set up and is now triggering … and apparently now sees coming?
Balance-sheet reduction is off auto-pilot, but it is still continuing at the same pace until those who are now watching while firmly holding the wheel, actually turn the ship’s wheel. The Fed has looked ahead, seen stormy waters, and, so, shut the auto-pilot off and backed off the rate-hike throttle. I still maintain, as I always have, the Fed will not back down the throttle on its balance-sheet reduction in time because it has a solid history of backing off on its tightening too late, creating an endless repetition of recessionary cycles.
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