by Tom Luongo, Tom Luongo:
With the markets still firmly convinced the Federal Reserve will hike the Fed Funds Rate by just 25 basis points (0.25%) on Wednesday, I find it fascinating that no less a figure than Mohamed El-Erian, former head of PIMCO, argued for the Fed to stay the course and surprise markets with another 50 basis point move this week.
I agree with him. Completely.
I know you’re shocked.
This article came out on the same day as the latest US GDP figure (Q4 +2.6%), home sales (slowing but not terminal), inventories (down), and jobless claims (uninteresting). It was followed up with week ending data about consumer spending and the Fed’s favorite inflation indicator, the PCE deflator, coming in cooling as expected, and now just barely below the FFR, 4.4% vs. 4.5%.
TRUTH LIVES on at https://sgtreport.tv/
Oooh, positive real yield expectation of 0.1%. Quick, everyone the Fed made it safe to save in dollars again!
As the kids say on teh Twitterz, “SMFH.”
El-Erian made a number of points that support the ‘normie’ interpretation of Fed policy about taming inflation. They are good ones if you believe inflation is the Fed’s top priority (and not one of many priorities):
- While inflation will indeed continue to come down in the immediate future, its main drivers have been shifting to the service sector, thereby increasing the risk of more embedded price pressures when the labor market remains solid.
- With global growth surprising on the upside, the window for more orderly rate increases has been opened wider.
- Financial conditions have loosened significantly in recent months and, by some measures, are around levels that prevailed last March when the Fed initiated this hiking cycle.
- A faster journey to the peak rate that has already been signaled, and reiterated by Fed officials several times, reduces the complexities of linking the path to a variable destination.
There are also strong risk-management arguments in favor of another 50-point increase before downshifting to 25 basis points.
I like El-Erian’s second and third points best because they support the argument that I made in this month’s lead article in the Gold Goats ‘n Guns Newsletter that “There Is No Recession” coming in 2023.
Most likely 2024, but very unlikely 2023.
Global growth is not likely to go negative with these tailwinds:
- A mild winter in Europe implying lower energy costs for Europe this summer
- A counter-trend rally in the euro feeding directly into that ‘lower energy cost’ than forecasted for Europe thanks to higher FX bias.
- China ending its Zero-COVID policy to coincide with Janet Yellen’s Russian oil price cap implying China comes out of the COVID lockdown period ready to explode, esp. with a yuan below ¥6.8 and the PBoC having room to ‘expand.’
- Yellen doing a variation on Operation Twist to counteract Powell’s QT and spending down the Treasury’s GA balance.
- Last year’s blowout $1.2 trillion in new credit creation domestically fueling all manner of spending.
- Increased defense spending by the “Biden” administration.
- A tight labor market that will continue to rotate out of human resources masquerading as tech jobs and back into moving things around.
All of this data prompted the folks at Zerohedge to engage in a bit of projection saying that Powell is perplexed by the labor data.
This is not the picture that Powell is hoping for given the unprecedented tightening of monetary policy he has unleashed over the last year. There is nothing in this data that warrants a ‘pause’ by The Fed.
Yes, Tylers, you are correct the Fed doesn’t need to pause.
And no, Tylers, you are the ones perplexed because your basic premise continues to be wrong. The Fed can’t really fight this inflation because it’s not a credit demand inflation, which is what interest rates have the most control over, and short-term rates only then.
This data just gives FOMC Chair Jerome Powell more ammo to do what El-Erian and I are urging him to do, raise by 50 bps and move another tranche of investors out of ‘bargaining’ and into ‘depression’ on their way to ‘acceptance’ that the Fed Put is dead.
From where I sit the markets have finally moved on from ‘denial’ (for the most part) and are into ‘anger.’
The reality is that they should be getting closer to ‘acceptance’ that there is something else going on here than just the Fed trying to tame inflation.
There was a marked shift in market sentiment after Thursday’s GDP data. Treasury yields started rising, gold stopped dead and stocks didn’t do much of anything. This is not the confident picture of a dovish Fed on Wednesday.
Friday’s inflation data was also non-confirmatory of the need to slow things down. What bothers me most about all of this is that for so long the Fed caught flak for not raising rates and then when they finally do, it’s all this “but they’ll just pivot at the first sign of trouble,” nonsense that’s been the refrain since the first 25 bps rise last March.
The first signs of trouble are already here: car loan delinquencies, housing slow downs, credit card usage rising, car prices falling alongside corporate earnings necessitating big announced layoffs in tech. So, the Fed has withstood much more than it did under Bernanke and Yellen.
