How Can You Not Be Seeing This?
On May 2nd, the market is 90% convinced that the Federal Reserve is going to raise interest rates to 5.00%-5.25%. By the way, how many times in the past decade have we heard that this level on the FED Funds Rate is something we will never see again, and yet, here we are!
How can the FED hike rates again, even as many leading indicators are screaming recession?
This includes the FED’s favorite recession indicator:
Courtesy: Zerohedge.com, Bloomberg
Not only is this indicator SCREAMING from the top of its lungs that a recession is imminent, but is also trading at an all-time low!
Why isn’t the FED panicked or at least concerned?
After all, they have this data and they know everything we do.
On many occasions, Powell has said he hates focusing on one chart or an isolated piece of data and looks at a broad scope of figures, so just so you know I am not cherry-picking, take a look at where the Philadelphia Federal Reserve business survey is, as of today:
Courtesy: Zerohedge.com, Bloomberg
The Federal Reserve is the most important banking institution in the world. Its decisions make or break countries and its mere statements and opinions move trillions of dollars around.
In its 110 years of existence, the Federal Reserve carries trauma and few scars, which have shaped its culture and thinking.
The Great Depression, for example, is one of the most researched and dissected events, as the country grappled with insane levels of misery and the FED is blamed for not acting fast.
Lessons from the Great Depression inspired the post-2008 response by Chairman Bernanke.
One of the other major periods the FED is obsessed with is that of the 1970s.
When Nixon closed the gold window, a wave of inflation that the U.S. was not accustomed to was unleashed.
The FED didn’t have a playbook for fiat monetary regimes and thought it had inflation under control in the middle of the decade, so it relaxed interest rates, but inflation surged back higher.
Jerome Powell has spent an extensive amount of time reading the meeting notes and the minutes of the Federal Reserve board from that era, and his mantra is to make sure he doesn’t ease interest rates, so that he won’t have to do what Paul Volcker did and cause a hard recession.
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In the 1970’s, the Federal Reserve was dealing with a new monetary system, whereas the inflation of today originates from the messy stimulus programs that were issued in the pandemic.
The reasoning and the logic are the same, though. The FED wants to keep rates high for as long as the economy allows, without breaking in half.
Powell is fighting with very strong inflationary forces, originating from plenty of stimulus programs and record amounts of cash at the household level, along with a demographic labor shortage. This is due to the mass retirement of baby boomers, with no generation of Americans to quickly replace them, at the same time as many supply chains are replicating themselves from China to other countries.
His safest bet is to try to keep interest rates very high for as long as the economy can maintain it.
That’s why I am sure that interest rates will stay elevated for longer than anyone thinks.
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