Last week the Federal Reserve surprised markets with one of the most dovish statements of the past fifteen years. This week, FOMC member after FOMC member, has done his best to rescind it. First it was a couple of non-voting members, Charlie Evans and Dennis Lockhart, who made some hawkish comments. The market didn’t like that, but they aren’t voting board members, so the market tried to shrug it off. Then San Francisco’s Fed President Williams indicated he would advocate for an interest rate hike at the April meeting. And yesterday morning, influential FOMC member James Bullard appeared on Bloomberg TV and basically did his best Jean Claude Trichet “I am worried inflation is about to take off” impression.
“You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,” Bullard said in a Bloomberg interview in New York Wednesday, in which he criticized the Fed’s practice of publishing officials’ projections on the path of interest rates. “I think we are going to end up overshooting on inflation” and the natural rate of unemployment, he said.
Bullard might well be correct to worry about inflation, but we will not get lift off if Central Bankers continually frighten the market about higher rates at the first hint of a pickup. Until Central Bankers are “responsibly irresponsible”, the market will be mired in a balance sheet constrained environment. If the market knows every time there is a slight uptick in the economy Central Bankers will be there to squash it, the risks will not be in missing out on the rise, but instead the mistake will be in buying an over appreciated asset. In essence, there is no rush to spend or invest today because the market has figured out with Central Banks capping the upside, the real problem is deflation not inflation.
It’s obviously not that easy because even as the Fed frets about inflation, the ECB and the BoJ have their monetary policy running red hot with the threat of pushing down on the accelerator even further. But these opposing policies create more problems than they solve. The world economy doesn’t need the ECB or the BoJ to engage in more QE, or the Swiss or Swedes to lower their rates to even more negative levels, what the global financial system needs is the Federal Reserve to stop their tightening campaign.
I had thought Yellen managed to get the FOMC committee to agree to easing up on the brake, but it is now obvious there is serious dissent amongst the board.
And these jokers are busy debating their differences in a public forum which only makes everything worse. Their policies are a complete shit show. If they want to tighten, they should have done it last meeting. Instead they sent dovish signals and then immediately went to work at retracting them. Their flip flopping will end up being worse than either outcome.
Their infamous dots are a complete waste of time that only confuses the market. And all the different FOMC members’ speeches are only helping the market realize how little they all know.
I firmly believe the first quarter sell off was a self inflicted wound from the Federal Reserve’s overly zealous tightening campaign. Count me in the Ray Dalio “they are making a 1937 style mistake” camp. I was hopeful the rest of the world gave the Federal Reserve an earful in the depths of February’s lows, and the Fed was just slow in responding, not tone deaf.
That premise now needs to be seriously questioned. I don’t know anymore what to think about the Fed’s stance. They are sending so many mixed messages, it is difficult to understand their intentions. They want to raise, but their hawkish rhetoric causes market disruption, so they chicken out, which only causes a rally, which instantly has the Fed moving back with threats of tightening. It’s like a dog chasing its tail.
If there was no deal amongst G20 government officials for the Federal Reserve to ease off on the tightening for the sake of the global economy, or even if there was a deal but Yellen cannot enforce it amongst her board, then we will become mired in the old paradigm of; higher US dollar, lower commodities (mainly oil), with stresses on risk assets and chances that China will be forced to devalue. All of February worries will quickly return.
Just look at yesterday’s action to get a sense of what might happen if the Fed continues with their hawkish rhetoric.
Stocks down, oil down, US dollar up and bonds up. This was all Bullard’s doing. The only question is whether it sticks.
I wish I could tell you which path the market is headed down. I don’t know, and based on the Federal Reserve committee’s behaviour, I am not sure anyone does (least of all them).
Although gold was hammered yesterday, the more the Federal Reserve confuses the market, the less willing investors will be to believe in Central Banks’ ability to navigate through this delicate period. Buying gold and shorting spooz is the ultimate “loss in Central Bank” trade.
During the first couple months of 2016 this trade was a monster winner. For the past few weeks, as hopes for an easing up on the tightening campaign filled investors’ dreams, the trade has corrected. But it has now declined right into solid support. I think it is worth a shot on the long side down here. I am buying gold and shorting S&Ps. As long as the Fed is intent on tightening until something breaks, I think this trade offers a good risk reward.
Thanks for reading,
PS: There will be no MacroTourist on Friday and Monday. Happy Easter everyone!