The Fed is so confused it’s beginning to confuse the markets too.
The basic Fed model set up by Janet Yellen and continued by Jay Powell was that the Fed would raise rates four times per year (March, June, September and December), by 0.25% each time, until the fed funds target rate hit 3.75%, at which point the Fed would step back and evaluate the situation. The rate hikes had nothing to do with “data” and everything to do with having dry powder for the next recession.
The only exception to this clockwork program would be an occasional “pause” if the Fed saw strong disinflation, disorderly market declines or job losses. The finesse was to raise rates without causing the recession the Fed was bracing to cure.
While Wall Street jabbered about other factors (yield curve, nonexistent inflation, bad days in the market), the Fed stayed on track So far, so good.
Yellen threw a monkey wrench into this with her “quantitative tightening” (QT) started in October 2017. QT is the equivalent of burning money, the opposite of QE. Then Powell threw another monkey wrench with his early October comment that the Fed was a “long way” from a “neutral” policy rate. This was a mistake, because “neutral” doesn’t exist (it’s another meaningless academic theory) and neutral is not the Fed’s real goal anyway (it’s the 3.75% target).
This hawkish comment sent markets into a tailspin in October. Powell corrected the record in November by saying the Fed was actually “just below” neutral (another irrelevant comment, but markets cheered and reversed some October losses). As this article reports, the Fed is now boxed in by Powell’s sloppiness.
There’s a Fed meeting on Dec. 19. If Powell is dovish, there may be a year-end “Christmas rally” on Wall Street. If Powell is hawkish, markets may tank going into year-end. But the entire debate is like a false flag operation because it has nothing to do with the Fed’s real goal of dry powder.
Powell is not an economist; he’s a lawyer. He should stick to a pragmatic approach and not get pulled into the academic mumbo-jumbo about the “neutral” rate. The Fed will probably try to square the circle with slightly more dovish economic forecasts and slightly more hawkish comments on “gradual” rate hikes.
Meanwhile, the QT juggernaut is slowing the economy with or without rate hikes. The market can digest all of this along with their Christmas turkeys. Confusion reigns.
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