The Fed Is Not On Our Side

Wednesday, June 13, 2018
By Paul Martin

by Kevin Muir via The Macro Tourist
Wed, 06/13/2018

Going to make today’s post short and sweet.

Recently the market has gotten somewhat excited that the Federal Reserve might slow down the rate of Federal Funds tightening. This has been the result of three developments:

1.A few speeches from FOMC Board members that indicated the Federal Reserve was concerned about the flattening yield curve, and that the Fed’s goal would be to ensure it doesn’t invert.

2.A recent phenomenon where the effective Fed funds rate is trading at a higher spread to IOER (interest on excess reserves).

3.The increasing troubles in certain emerging market countries as US dollar liquidity has tightened.

Between these three concerns, the market has built a “dovish hike” into today’s FOMC announcement. Many participants believe the Fed is more likely to slow the pace of tightenings as opposed to increasing it.

Well, sold to them.

I am not claiming to know what the correct policy should be, but I am confident that Jerome Powell’s Federal Reserve will not alter course for any of these three reasons.

The Federal Reserve will hike at least every other meeting until something breaks. Full stop.

Powell will not reduce this pace because the 5-30 spread is hitting new lows. Nor will he care about the effective Fed Funds spread over IOER. And finally, the Federal Reserve has a mandate to set policy for the USA and will not alter course because of emerging market wobbles.

Additionally, there have been stories indicating the Federal Reserve is considering holding press conferences every meeting as opposed to every second one. Although there are plenty of good reasons to change this policy, I believe that Powell is worried he will have to raise rates at a quicker pace in the future.

Let’s face it, on the metrics that matter to the Federal Reserve (employment and inflation), the signals are all pointing to an economy that needs higher rates.

The Rest…HERE

One Response to “The Fed Is Not On Our Side”

  1. Strayhorse

    A-U-D-I-T THE FED. Must America suffer another TARP bailout or Major Depression before the United States and the World come to grips with the fact that the Federal Reserve is the alpha and omega of economic depressions? A-U-D-I-T THE FED


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