by David Haggith
Today the market has paid off for some of his delusional holdings. He has a lot more to pay. You see, the market believed the Fed all last year when the Fed said inflation was transitory. Or, at least, market leaders sold the Fed narrative, speeding us toward disaster.
It is unclear whether market leaders actually believed this narrative or even if the Fed did. Maybe the Fed was just hoping it was true. What is clear is that the Fed, which also sold everyone on the belief that it was data-dependent, had almost no data for all of last year on which to base its “transitional” narrative and all kinds of data that they said it wasn’t even that. close to being transitory. I know this for a fact based on data because I kept pumping out this data as I found it myself; and, if he could see it in such overwhelming abundance, so could they. Or at least like that it should they.
What matters is not whether the Fed believed its story or even whether market leaders believed it. What matters is that all market followers believed it and swallowed it whole. As a result, when the Fed said this year that it would be tightening for a long time because the “transitional” narrative “wasn’t helpful,” the market didn’t believe the Fed. So it hasn’t come down in price as much as you’d think it would.
Today, he got another stark reminder that the Fed is serious about fighting inflation that is not really transitory when the Fed delivered another rate hike of 0.75%. That brings the Fed’s benchmark interest rate to an incredibly soft 3.0-3.25%. Adjust that interest rate for inflation, and it’s still deeply negative. In other words, it’s much cheaper to take out a loan to buy a car now than to save money and buy it with cash later. You are losing all the time you save. So it remains a very encouraging index, which has the effect of pushing forward tomorrow’s sales to boost today’s economy.
The cost of getting it wrong with the Fed
You can see what it costs when the Fed is dead wrong on one of its core beliefs: in this case, core inflation. The Fed should have started to slowly tighten early last year to curb inflation in upward moves as soon as inflation started to heat up, but the Fed believed that inflation was just an anomaly that would go away on its own alone
Today, the Fed is so wrong about another anomaly that it doesn’t understand, I just wrote about it in “Everybody sings the tune ‘Strong Labor Market’ in unison while the band plays, and they’re all DEAD wrong!” What What I want to do today is highlight the cost of believing the Fed’s misguided narrative. If the Fed had not believed its transition narrative, or at least based everything it did on the hope that the transition would be that way, inflation would have been gradually tightened, and the market would have already seen it to be so. serious, consistent, and progressively tougher, and inflation would not have risen as much and would already be on the way down. Because the Fed was wrong , the market continued until a couple of weeks ago to believe that all this tightening was just a head fake that would quickly disappear in a predictable Powell Pivot. Powell is still struggling to gain the market’s confidence in what he is saying.
Days like today where the market bounced up, then down, then up and then hard enough to end up 522 points in the hole show that the market will have to give back everything it has been holding on to badly. . in the end. Investors have been hit over the head because they haven’t listened to the Fed because the Fed has lost a lot of credibility.
Now, Powell is making an even more catastrophic mistake, as I explained in this article, and the mistake will cost him much more credibility in the future when the Fed needs credibility the most and when we all need it. believe in the Fed but can’t. Once again, in his presser, Powell commented that the economy is fundamentally resilient. It even claimed modest output growth on the same day its own bank claimed its own GDPNow predicted that his GDP prediction would return to almost zero:
Interestingly, for the first time all year, economists’ consensus forecasts have remained below the Atlanta Fed for the entire quarter. This is a reversal from previous quarters where they were well above the Fed. Consensus economists don’t quite believe in the Fed anymore, it seems. On top of that, we’re not even through the quarter, and what we’ve seen in each of the last two quarters was that the Atlanta Fed went down to where it is now at this point in the quarter and after closing the quarter, its forecast. it went lower and lower until it reached where real GDP came out when it was revealed. Each time, I predicted that the quarter would be negative (recessionary), and each time it was, and I’m predicting the same this quarter.
That will give us three negative quarters of real GDP “growth,” which is almost a full year of recession, as the NBER continues to debate whether or not it should believe the Fed that the economy is fundamentally strong (which has revised now to simply “resilient”) on the basis of the labor market or they should simply declare us to be in recession.
The price of getting their kind of transition wrong was what I warned about: the federation would have to tighten faster and harder when it was finally found to be wrong. Therefore, it is perfectly expected that it will be read today,
Three consecutive 75 basis point rate hikes are unprecedented since the Fed began explicitly targeting the federal funds rate to conduct monetary policy in the late 1980s.
In other words, the hardest and fastest he’s ever done in that time period.
Fed officials expect to raise rates more than before and keep them at that level for longer.
So the cost of getting something so central to the Fed’s mission wrong, since inflation is dead center to the Fed’s mission, is that you lose confidence in an organization to which trust is really its only business value, since that is the only one. thing their money is based on. Then you have to hurt people harder for longer and put the economy at worse risk, not less risk, when you take corrective action late.
That’s what this Fed FOMC meeting was all about, and that’s why the market fell more than 500 basis points even when everyone knew, at least on the face of it, that a 75 basis point hike was a virtual certainty that it would have to ‘having had a price.
That’s also why
Officials see the fed funds rate rising to 4.4% by the end of this year and 4.6% by the end of 2023. That’s up from 3.4% this year and 3.8 previous %
As our Fed chief summed it up,
“If we want to prepare, let’s really light the way to another very strong labor market period, we have to put inflation behind us,” Powell told reporters. “I wish there was a painless way to do it. There is not. What we need to do is get rates to the point where we are putting significant downward pressure on inflation. And that’s what we’re doing.”
And what is everyone pinning their hopes on as the basis for their belief in a fundamentally strong economy, or at least now downgraded to “resilient”? It is in the new that the Fed is dead wrong. The Fed believes that the strong labor market is NOT transitory when in fact the labor market made its transition from strong to deep. ill at the start of the Covid crisis, and the Fed doesn’t know how to see it as this article explains in detail.
Now it’s a big train wreck and inevitable
If you want to hear me talk about how much I care, I just did a podcast interview with Tom Pochari that you can listen to at Destructive Capital. (It’s at the top of the left column for now.) Why should you care? Because the cost of getting it wrong in the labor market is that the Fed is completely wrong about the recession we’re already in, and that means it’s still tightening faster and harder than ever three full quarters into a recession that sinks much deeper.
But another really risky cost is that when everyone finally realizes that the Fed is VERY WRONG about the labor market and as a result has been VERY WRONG about the recession after being VERY WRONG about inflation that has become very hot, the Fed is not. will he have any credibility left when it comes time to navigate the huge curve he’s plunging us all into. And if they have no credibility, they have nothing because the Fed’s faith and credit is all it has to sell.
Understanding WHY the Fed is wrong about this is as critical for this year as understanding why they were wrong about inflation was all of last year; and while some people saw the Fed as wrong about inflation last year, no one sees how the Fed is wrong about the labor market and the current recession that masks its belief in a strong labor market. This means that fear will explode as we cross the rails of the curve and everyone realizes at the same time that they were all wrong about the Fed.
The Fed is going ninety miles an hour, going down a three-mile grade and heading into a curve. This will be the worst trainwreck in Fed history like the “Wreck of the Old 97”. (After listening to the song, check out the Destructive Capital interview to hear me ramble on about the wreck the Fed is already dragging us into, and remember that train wrecks don’t all happen at once . They keep wrecking.) This interview and the article above are the most important realizations you can make ahead of the curve if you’re trying to bail before we go off the rails.