Blowin' In The Wind

Federal Reserve Chair Jerome Powell last week held sacred the Fed’s “precious” independence, but he apparently forgot how quickly and easily it’s been bullied into altering its monetary policy by both politicians and influential financial markets people.

Until just a couple of months ago, the Fed was determined to “normalize” interest rates and its enormous balance sheet. But after a relative – emphasis on that word – weak patch for the economy and howls of pain from investors during last year’s correction, the Powell Fed was lighting quick to reverse course and put a halt to more rate hikes and portfolio runoff until further notice.

Not surprisingly, the financial press hasn’t given President Trump any credit for this (if credit is the right word in this instance), even though he was clearly the first and loudest basher of tightening Fed policy. Wall Street then jumped on the bandwagon, and voila, we have a new “patient” Fed and an easier monetary policy – and the best January for stocks since the 1980s.
Powell and other members of the Fed have tried to justify their abrupt about-face by noting recent weak – again, relatively speaking – economic data. But January’s robust nonfarm payrolls report – nearly double the consensus forecast – calls that into serious question. Continue reading "Blowin' In The Wind"

Shutdown Or Not, The Fed Abides

Here’s an additional reason to be thankful for the independence of the Federal Reserve. Since the Fed does not receive funding through the congressional budgetary process and is largely self-funded through the interest on its massive government securities portfolio, plus its many other activities, we don’t have to worry that this week’s Federal Open Market Committee meeting will fall victim to the partial government shutdown.

But how much will actually happen at the meeting that can be expected to move the financial markets?

One thing we do know is that Fed Chair Jerome Powell will hold a press conference after the meeting ends at 2:00 EST. Last summer Powell announced that he will hold a presser at the end of each of the Fed’s 10 scheduled meetings, not just every three months.

But it’s unlikely that the Fed will raise interest rates at the meeting, after Powell largely put the kibosh on that idea late last year, when under extraordinary pressure from President Trump and just about everyone investor within reach of a microphone he and his Fed colleagues surrendered and said “no mas” to any more monetary tightening for a while. Continue reading "Shutdown Or Not, The Fed Abides"

Fed Doves Take Flight

A ‘wild card’ segment has been added to NFTRH reports because I wanted the freedom to go out of bounds in any direction, beyond our usual areas of disciplined coverage. Last week it was a look at the Semiconductor sector.

This week it is Fed policy with a side trip down memory lane, trying once again to illustrate why today is not at all like the ZIRP era and why the post-2015 re-connect between the Fed Funds rate and the stock market does not bode well for stocks, assuming the Fed really is going soft.

Excerpted from tomorrow’s edition of Notes From the Rabbit Hole, which will also include loads of actionable analysis along with the more theoretical stuff below…

Fed Doves Take Flight (But We Are Not in Kansas Anymore)

Wise guys trading Fed Funds futures see no more rate hikes in 2019, and a few even imagine a rate cut before year-end. Here are the projections for the next 3 meetings, showing an overwhelming view that the Fed will hold the current 225-250 target rate.  Continue reading "Fed Doves Take Flight"

Sorry, Virginia, There Is No Santa Claus

So who looks more right now, President Trump or Federal Reserve Chair Jerome Powell? Based on the market’s reaction to last week’s Fed rate increase, we’d have to say it isn’t Powell.

That doesn’t mean he isn’t right, at least looking at the situation objectively and what Powell is supposed to be doing as Fed chair. While it’s certainly arguable that the Fed does need to take a pause from raising interest rates for a few months to fully digest the recent economic data, which is showing the economy slowing some – but nowhere near a recession – it is right to continue tightening, no matter how unpalatable that is to the market.

Quite frankly, most of the calls for the Fed to refrain from raising interest rates are blatantly self-serving. Of course, investors don’t want the Fed to ever tighten policy, because, as we’ve seen, higher rates mean lower stock prices. Not many people like that, especially when it’s been ingrained in them over the past 10 years that stock prices only go one way – up – and that “buying the dips” is a no-lose strategy to make up for past losses.

Welcome to reality, folks. Continue reading "Sorry, Virginia, There Is No Santa Claus"

Is The Fed Done Tightening After December?

It’s beginning to look a lot like the Federal Reserve is done tightening, at least after next week’s monetary policy meeting, when it’s expected to raise interest rates another 25 basis points, to 2.5%, its fourth rate hike this year. After that, however, it’s looking less and less likely that it will raise rates at all next year, certainly not four times, which seemed to be the market consensus not all that long ago.

As we know well, Fed chair Jerome Powell told the Economic Club of New York late last month that interest rates are “just below” the so-called neutral rate, a retreat from his comments less than two months earlier that the fed funds rate was a “long way” from neutral. That sparked a big, but short-lived, rally in both bonds and stocks, as it left investors with the idea that Powell and the Fed are going to be a lot less hawkish moving forward in light of still somnolent inflation and now signs of a weakening economy, exacerbated by the recent inversion of some Treasury bond yield curves, which traditionally have been a sign of impending recession.

As CNBC’s Jim “Mad Money” Cramer noted on Monday, the Fed "risks its credibility" if it doesn’t raise rates next week, a move it has been telegraphing for several months. Failure to do so risks setting off a market panic because, as Cramer said, the Fed could create the impression that “there's something really wrong that we don't know about.” So the Fed has largely backed itself into a corner and must go through with it, whether it wants to now or not.

But what about next year? Continue reading "Is The Fed Done Tightening After December?"