Thursday afternoon, there was a press conference. Some dots were moved about on a piece of paper and JPOW threatened a few basis points of yield in a year or two. I didn’t bother to tune in because I had a hunch that nothing would happen. I was correct. Absolutely nothing happened at the meeting. If not for the price action in some securities I follow, it would be another day of boring summer trading.
Traders are addicted to trading, much like murderers fixate on murdering. The traders noticed a slight change in the Fed’s tone and sold anything tied to inflation. They whacked gold good. Then they went after the other commodities. When they were done there, they went after value stocks, before finishing the week by blasting a bunch of cyclical names. In summary, JPOW got what he wanted—he’s now the tough guy. For months, everyone had been going about life, noticing that prices were rapidly increasing. Now, JPOW can say he did something about it.
Did he actually do anything about inflation? Of course not. In the short run, commodity and equity prices may continue to back off a bit as sentiment was lopsided and leaning aggressively long inflation. The first time you talk down a raging bull market, you can scare it a bit.
It won’t be long before the market calls his bluff. Our economy is booming and the Fed is still printing at “ludicrous mode.” Let’s bring the dot plots forward. Say he raises rates before year-end, will it even matter? It would probably blow up some hedge fund with curve steepeners, but will it change anything in the real economy? Of course not. Who cares if a mortgage costs a few dollars more each month? Is there anything else tied to rates that even matters in most people’s lives?
Besides, the fiscal side is now driving the business cycle—the Fed is a side-show. On the fiscal side, both parties are pushing multi-trillion-dollar spending plans. Do you remember when a trillion was a big number? Well, it still is. They’ll water some of these plans down and maybe change who gets the benefits, but both parties are addicted to spending. The Fed merely exists to ensure that someone buys all the new treasuries that will be issued. With this backdrop, will JPOW actually change anything serious on the monetary side? Nope. How can he? If he steps away, the bond market collapses. He’ll tinker at the edges, but he’ll be forced to continue printing. In a way, he’s sort of irrelevant now as we head towards the end-game. Fiscal now drives things.
So, what do I think happens? I haven’t got a clue about next week or even next month—that’s not my game. A bunch of stimmie programs are set to expire in the next few months. We could see the consumer side suffer a bit. We could see wage inflation back off as workers return after 18-months of couch-surfing. However, this is all healthy for the economy. I really do not think anything has actually changed. If assets back off, I’m a buyer of inflation. Do you think they kept rates at zero in Zimbabwe?
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