WASHINGTON. Friday’s opening bell on Wall Street found US stocks trading in the moderate irrational exuberance zone. Microsoft (trading symbol: MSFT) beat earnings nicely, giving a boost to tech stocks. Many other sectors followed suit. But then traders and investors parsed contradictory Fed interest rate opinions while President Trump blasted the Fed’s inept policies once again. The result: as of the noon hour Friday, indexes are slowly backtracking before the weekend break. Because interest rate confusion. Forget Microsoft.
ZH on Fed interest rate confusion
ZeroHedge provides some color on the Fed interest rate mess.
“US stock futures rose back over 3,000 as blowout results for Microsoft’s cloud business fed into a bullish mood despite confusing signs from NY York Fed President John Williams that the U.S. central bank was set to cut interest rates either once or twice (if one is academically inclined) this month, while Jim Bullard said one rate cut is enough, even as the market is now pricing odds as high as 70% of a 50bps in rate cuts.”
When has the Fed not been confused?
Dating back to the beginning of the Great Recession and actually even a bit earlier, the often contradictory public comments and chattering of Fed officials broke with the old policy of letting only the Chairman opine on the state of the economic state. The whole idea here was to open the window a bit on the weird world of government financing and monetary policy. And indeed, that seemed a good thing.
Or, at least it did when the US economy was going straight to hell. The average American whether [fill in your pronoun of choice] would be selling apples on the street corner for bread the next day.
Yet, with the American economy now begging to meet or beat the arbitrary Fed inflation target of ~2 percent per annum, the Fed has remained stubborn to this point. Fed Chair Jerome Powell essentially promised interest rate cuts way back in December of 2018. But over 6 months later, that promise is beginning to feel like being constipated. Nothing has moved.
The market now buzzes with rumors as to the size of this big, absolutely for sure and totally certain July rate cut. But it’s by no means certain that we’ll even see one, so mealy-mouthed have the constant Fed bafflegab pronouncements turned out to be.
The Federal Reserve should get its head out of obsolete economic textbooks
The Fed should have damn well corrected its overreach on interest rates last fall, before interest rate worries badly damaged stocks for the entire fourth quarter of 2018. The problem might be that Trump has been completely right for over a year on the Fed’s interest rate overreach. But now the Fed doesn’t want to seem to overreact to the President’s carping, because, Fed independence from politics.
We’d argue here that the Fed is operating on stodgy, unproven theories and remains, at least in part, a key cog in the Democrats’ and Deep States’ desire to engineer a recession in 2020 with the aim of “impeaching” Trump via the overstuffed ballot boxes in most American cities.
Whatever the case, complicating matters, the Fed has yet to slow or stop its reverse QE monthly bond inventory dumping scheme. That, combined with the Fed’s unjustifiably high interest rates continues to put a deflationary break on Trump’s heretofore magnificent industrial expansion. But, given the decade-plus long essentially zero inflation rate environment in the American economy, WTF does the central bank think it’s doing?
After all, the whole original idea, which people seem to forget, is that once the Fed stabilized the banking system and the economy post-Great Recession, the central bank would very quietly allow the economy to re-inflate as one path towards erasing the huge US budget deficits the Fed and the Treasury were racking up. Since the Obama Administration and a deadlocked Congress never bothered to help the Fed out with real government-led economic stimulus, the inflate-us-out-of-a-big-economic-hole plan never unfolded.
Unlike Obama, Trump helps the economy by growing it. Why cap inflation when there is none?
Trump has singlehandedly supplied the missing puzzle part. But, two Chair-[plural pronoun] past Ben Bernanke, the current Fed has either ignored Bernanke’s plan or doesn’t have any institutional memory of it. Here we have yet another example of Washington torpor, stupidity. Not to mention government fiefdoms that regard other government branches or agencies as industrial competitors slated for destruction. Except that all these players are supposed to be working together. For us. A quaint notion, apparently, amongst those Harvard and Yale grads who run the Deep State like the Eurocrat successors to Louis XIV et. al. have always done.
Forgive the rant. But having lived in this government town almost nonstop from 1967 onward, I’ve watched our Federal government gradually transform itself from an at least partially functioning entity into something like a massive La Brea Tar Pit. It sucks all comers into and under goopy pool that devours them until only their bones are left.
Nothing important gets done, everything is post-1968 Street Theater for the masses, as the city’s aging, former “radical” Boomers try to finish what they couldn’t get done in 1968. It’s a hell hole. And we investors and taxpayers pay for this crap. It’s frustrating. And the current interest rate confusion is just part of the mess. Absolutely nothing works in this city anymore.
Washington’s Presidential Energizer Bunny buried by bureaucrats
Except for that Energizer Bunny known as Donald John Trump. He manages to actually keep his election promises. He does so despite 24/7 attacks by the media, by bat-shit crazy Democrats and by most members of his own party. The GOP, of course, for decades has been known as the Stupid Party for this very reason. They never miss a chance to snatch defeat from the jaws of victory.
At any rate, just to clear up the interest rate confusion as best we can, the Fed is likely, but not guaranteed, to announce a 0.25 percent interest rate cut at the conclusion of its July 30-31 meeting. The market periodically gets excited when it hears unsupported freelance comments from the likes of John Williams. He probably means well, but at least indirectly supports those 0.50 percent rumors.
If the Fed were to cut by the larger amount, we’d likely experience, for at least a few days, the Mother of All Rallies. But for a variety of reasons, this outcome is unlikely.
Ditto no interest rate action at all. Which, of course, would likely cause the Mother of All Crashes, dooming Trump’s 2020 electoral chances and warming the hearts of “progressive” Democrats as the unemployment lines begin to grow. But at this point, this scenario seems highly unlikely because it’s so economically stupid and counterproductive.
But then again…
You see why interest rate confusion has been riling the markets this week. And why it’s likely to happen again next week as well. Until the Fed Oracle speaks. In bafflegab.
Have a great weekend, and let’s forget about this nonsense for at least a couple of days as we hide out from a promised US heat wave here on the East Coast.
— Headline image: Confused? So are we. And so is the Fed. About interest rates. Will they or won’t they?
(Image via Pixabay.com, public domain, CC 0.0 license.)