Markets Are “Fighting the Fed”

One of the most important dictums in finance is this: “Don’t fight the Fed.” And this could get ugly.

By Wolf Richter. This is the transcript of my podcast recorded last Sunday, THE WOLF STREET REPORT.

During the money-printing binge and interest rate repression starting in March 2020, the Wall Street hype organs repeated this endlessly, “Don’t fight the Fed.”

If the Federal Reserve cuts interest rates and prints money, then asset prices are going to jump, and yields are going to fall, so don’t fight the Fed, jump in with both feet, borrow, lever up, and buy assets and ride that baby all the way to the moon. And that worked.

And then we got inflation. A lot of inflation. Last fall, the Fed finally stopped brushing off inflation and started taking it seriously and pivoted. It announced a slow path to tightening its loosey-goosey monetary policies. And at each meeting, the tightening announcements became faster and steeper and more urgent.

The Fed ended Quantitative Easing early this year. In March, it hiked its policy interest rates by a quarter percentage point, and in April it hiked them by half a percentage point. And it indicated that it would hike more, and that it would frontload the rate hikes, etc.

And throughout the first five months of the year, interest rates soared, yields soared, even junk bond yields rose, and the spread – so that’s the difference – between yields of junk bonds and yields of Treasury securities widened. Mortgage rates soared.

And when yields rise, bond prices fall, and they did fall by a lot. And stocks and cryptos fell, and housing started to show the first signs of a slowdown, and commercial real estate was suddenly confronted with soaring cap rates and dropping prices.

These are all signs of tightening financial conditions, meaning it gets harder and more expensive to borrow, for companies and for consumers, and these tighter financial conditions will eventually translate into less borrowing, and therefor into less investment and consumption, and as demand backs off some, it takes pressure off prices. And if that lasts long enough, inflation begins to back off. That’s how the Fed cracks down on inflation.

In other words, earlier this year, markets believed what the Fed was telling them, that its number one concern was inflation, and that it would tighten its policies, and raise interest rates and reduce its balance sheet – called “quantitative tightening” – in order to tighten financial conditions, which makes borrowing more difficult and more expensive, and which then reduces demand, which eventually maybe removes the fuel from this inflation.

So markets played along with what the Fed was trying to accomplish. Yields jumped, as they were supposed to, which made borrowing more expensive. And asset prices fell, which is part of the deal.

Then in June, to hammer home the message that it was serious about getting on top of this raging inflation, the Fed raised its policy rates by three-quarters of a percentage point, the biggest rate-hike since 1994.

And then this past week, it raised its policy interest rates by another three-quarters of a percentage point. And quantitative tightening started in July, and its balance sheet has started to shrink.

And that’s when the markets began fighting the Fed. The rhetoric that markets spread around was amazing and self-contradictory, it was funny really, and it was carried out in the financial media and by an army of trolls that spread nonsense around the internet. But the rhetoric didn’t matter.

What mattered was that the markets weren’t doing what the Federal Reserve was relying on them do, namely transmit its monetary policies to the financial conditions, making them tighter, and thereby transmitting them to the economy.

But instead, markets went in the opposite direction:

On June 14, the day before the Fed hiked by three-quarter percentage points for the first time since 1994, the 10-year US Treasury yield reached 3.5%, the highest in years.

The next day, June 15, the day of the big rate hike, the 10-year yield began to fall, and it fell and fell and fell. And then last Wednesday, so that was July 27th, the Fed hit markets with another 75-basis point rate hike, and bond yields continued to fall.

On Friday, so July 29th, the 10-year yield closed at 2.67%, the lowest since early April.

And junk bond yields fell since mid-June, and mortgage rates started coming down, and spreads between junk bonds and Treasuries narrowed. And stocks jumped, and it all boiled down to this:

Since June 15, when the Fed started doing the big rate hikes in order to get markets to tighten financial conditions, markets have done the opposite, and financial conditions have loosened.

The Fed has spent years trying very hard to destroy, wipe out, annihilate, and incinerate its credibility as an inflation fighter.

The money-printing binge that started in 2008 has turned the Fed into a money-printer, not an inflation fighter. This money-printing continued even in 2021, as inflation had already begun to rage. And this created the Fed’s rock-solid credibility as an inflation arsonist.

And that’s the reputation the Fed now has, and cannot shake. Markets don’t believe the Fed. They expect that the Fed will buckle and pivot, instead of tightening further. And so they refuse to transmit its monetary policies, and instead start betting on a pivot and rate cuts and money-printing or whatever.

The rhetoric right now goes kind of like this: these big rate hikes will cause a recession, and the Fed will then pivot and cut rates in September or whenever. And so in anticipation of these rate cuts, asset prices soared and yields plunged.

But this rhetoric is self-contradictory. Why? Because by betting on the pivot and driving down yields and driving up asset prices, the markets have loosened financial conditions. But by loosening these financial conditions, the markets are throwing more fuel on the inflation fire and are fueling more demand, thereby reducing the chances of a recession big enough to trigger a major decline in inflation and a pivot by the Fed.

By loosening the financial conditions, the markets themselves have torpedoed their own reasoning for a Fed pivot. That’s the irony. Markets have become totally delusional about this.

But the Fed isn’t going to pivot until this raging inflation is headed back to 2%, and now we’re at 9%.

And by loosening financial conditions and pushing yields down and asset prices up, the markets have, ironically, taken any and all pressure off the Fed to actually pivot. Like I said, markets are delusional right now.

Last time the Fed did a rate-cut pivot was indicated in December 2018. At that time, inflation was below the Fed’s target, President Trump was yelling at Powell on Twitter and in front of microphones on a daily basis to pressure him to end QT and to cut rates, and there was talk that he was trying to figure out how to fire Powell. And markets screamed at Powell because the S&P 500 was down 20% and mortgage rates were over 5%, and yet inflation was below the Fed’s target. And so the Fed pivoted.

Now there’s 9% inflation. And that changes everything.

In the press conference on Wednesday, Powell said that the Fed, “wouldn’t hesitate” to hike rates by a full percentage point – so by 100 basis points – if needed. And he put another 75-basis point rate hike on the table for September. He said it was “necessary” to lower demand, and “necessary” to soften the labor market. And he said you cannot have a long-term strong labor market when there is lots of inflation. He said that in order to achieve their dual mandate of price stability and full employment, they would have to get inflation back down.

He said the Fed is “determined” to get this inflation under control.  And he brushed off the possibility of a recession and even if it happened, it wouldn’t change monetary policies until inflation is heading back to 2%.

He said these things many times during the press conference so that everyone would get it.

This was the most hawkish press conference in decades. And yet, the markets which have now turned into tightening-deniers, picked out of context a couple of lines from the Q&A during the press conference and came up with their own theory. It was really funny how that happened.

But there is a huge problem with that: The Fed relies on the markets to transmit the Fed’s monetary policies to the financial conditions – meaning higher interest rates, wider spreads, lower asset prices, etc. – so that these tighter financial conditions would then transmit the Fed’s monetary policies to the overall economy and reduce demand, which then slowly dials down the inflationary pressures, and prices go up less because there is less demand, and inflation begins to fizzle.

That’s the hope. But markets have done the opposite.

Since the press conference last week, two Fed governors – both very big doves, Bostic and Kashkari – have come out saying that the markets essentially got it wrong. And there will be more governors speaking out on this.

[Update: the original podcast came out Jul 31. By now, the morning of Aug 3, four more Fed governors have come out leaning against the market’s interpretation: Mester, Daly, Evans,and Bullard. Each talked about the Fed’s unrelenting anti-inflation stance. They all see significantly higher rates and no pivot anytime soon].

If markets refuse to transmit the Fed’s monetary policies to the financial conditions and the economy, then the Fed will have to keep knocking the markets over the head with rate hikes until they get the memo and start transmitting them.

The markets’ refusal to transmit the Fed’s monetary policies can fuel inflation further, drag it out further, drive it up further, entrench it further and make it that much harder and more painful to get under control, and it will ultimately cause the Fed to hike further, much further than expected.

And when markets ultimately get it and start transmitting the policies, and with rates far higher than they would have been, and with inflation higher and more entrenched than it would have been, reality in the markets can get a lot uglier fast. And if markets keep fighting the Fed, they’re going to be confronted with this worst-case scenario.

Paul Volcker, chairman of the Federal Reserve in the late 1970s and 1980s, during the huge spike of inflation, ran into the same problem: markets were fighting the Fed, and they weren’t listening to him, and he couldn’t get through to them, and he ended up having to go far higher with Fed tightening, as inflation kept coming back, until the Fed finally took short-term rates to ridiculous highs, which then did the trick – but it caused the nasty second dip of the double-dip recession and all kinds of economic upheaval.

The Fed needs the markets to transmit its monetary policies to where they reach the economy. And if markets refuse to transmit, and instead keep sending out their tightening-deniers in droves, and bet on a pivot, the Fed will keep tightening until everyone gets the memo. And the longer this goes on, the uglier it’s going to get when markets finally stop fighting the Fed.

You can subscribe to THE WOLF STREET REPORT on YouTube or download it wherever you get your podcasts.

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.




  259 comments for “Markets Are “Fighting the Fed”

  1. sunny129 says:

    ..prices go up less because there is less demand, and inflation begins to fizzle.
    That’s the hope. But markets have done the opposite’

    Wonder why? B/c Mr. Powell lacks credibility/integrity unlike Mr. Volcker. Investors are front running the mkt ever since the first QE. They have been consistently right! He also said that Fed is close to neutral rate, without defining the number. WHY?

    In essence Mkt just doesn’t trust Mr. Powell. This is/was self inflicted damage on their reputation.

    Look today. Perception over reality! Mkts are zooming again against the fundamentals. Mr. Powell has to follow like Mr. Volcker. Can he? Just words but no credible action.

    • SS says:

      Ver good point. Only the test of fire makes steel. Powell has still not been tested with high unemployment, big layoffs, large corrections and bankruptcies.

      Markets are good at separating boys from men and Powell doesn’t seem to make the cut.

      • Wolf Richter says:

        If we get the scenario you’re describing – “high unemployment, big layoffs, large corrections and bankruptcies” – we will get exactly the scenario that will reduce demand enough to reduce inflation by a lot. See 1982. That’ll work. It’s known to work. That’s how you beat inflation. You’ve got to cut demand. And if a plunge in demand of that type smashes inflation, the Fed will cut rates, as it should. That’s what this is all about. See the 1980s.

        • Old Ghost says:

          Wolf, the FED will do whatever it takes to save the private banking cartel that owns them. That is their only real “mandate”. If the private banks would be hurt by a sudden large interest rate hike, then it will not happen (think of the poor derivatives).

          No financial depression/recession is ever exactly the same as the earlier ones. So expect a few surprises. One thing that is a “sure thing”, is that the bottom 80-90% of the population will be the ones footing the bill.

          For the folks who credit inflation to “money printing”. There are other ways to remove excess money/credit from the system. The government could tax like they did back in the 1940’s and 50’s. But now that Wall Street has captured the government, that isn’t likely to happen.

        • Magnolia says:

          This is not the 80s. There’s no China to eat our inflation, and deglobalization is progressing fast. Add the insanity and urgency of climate fights. The new secular regime can only be inflationary, and there’s nothing to stop it.

        • SS says:

          Inflation seems more of supply problem than demand problem. Unit sales are nearly same as pre-pandemic. The dollar sales are bloated due to cost increases. You can simply check the truck shipments data to confirm.

          The bigger problem we have today is that there are few opportunities and fewer incentives to do actual productive work.

          We need to get productive work back to US and that will only happen when we reduce speculation in asset bubbles so that resources are priced to allow production to be internationally competitive. Also reduction in Asset prices will motivate people to work rather than speculate. This work will reduce debt and increase supply.

          The Fed seems to have forgotten basic economics.

        • Wolf Richter says:

          SS,

          CPI for services — and they don’t involve a lot of “supply chains”:

        • SomethingStinks says:

          So then why not throw a hail Mary? Say you are going to raise by .75% but when time comes raise by 2 or 3%? You know the dude has a big stick, wonder what is keeping him from using it…. fear or greed.

        • People with money want high interest rates to preserve the value of the money.

          Regular people who work and do not have much money would very much not like to see an extreme recession with mass layoffs, factories closing and so forth.

          The Feds is trying to keep both groups happy.

        • Shandy says:

          That’s a wild call you willing to wager?

        • Citizen says:

          It’s truly amazing how the market and especially this generation is so confident that it will always be easy to make more money. This needs to break.

          It makes me physically ill every time the market manufactures some way to optimistically spin whatever the bad news of the day is. It’s just pathetic how it constantly finds any excuse no matter how weak or how much it flies in the face of common sense in order to find a way to view things positively.

          I just can’t take it anymore, I thought this was it finally but maybe with the whole world convinced that buying the dip always works and that the only way to do things is to constantly put money into the market every month … maybe it never will go down.

    • andy says:

      “Modern central banks have more credibility than their counterparts in the 1970s,” St. Louis Federal Reserve President James Bullard said during a speech in New York. “Because of this … the Fed and the [European Central Bank] may be able to disinflate in an orderly manner and achieve a relatively soft landing.”

      • Gattopardo says:

        I read that article and had to check the URL, thinking maybe it was The Onion.

        • Depth Charge says:

          These guys are high on their own supply and suffering from delusions of grandeur. They have been given too much power. The FED needs to be neutered badly.

      • Einhal says:

        Always funny to hear a person talk about his own credibility. I’m sure a lot of ugly girls think they are hot too.

      • Eastwind says:

        That’s perspective bias. When Bullard was not a central banker, central bankers had less credibility than after he became a central banker, from his current viewpoint as a central banker.

        Not worth much as opinions go.

        @wolf: you need that FCI graph with the declining bumps that ZH keeps posting. Or is that plagiarism?

      • Keppered says:

        Barf

    • jon says:

      FED made a mistake by not hiking rates by 100 bps. Also, the message was very soft by Powell.
      Not sure, what’s in the future but the more the market goes up, easier it’d be for FED to keep hiking rates till inflation reach 2-3%.

      It means one day there would be a rude awakening for market.

    • Wisdom Seeker says:

      Two things to keep in mind –

      (1) Volcker didn’t earn his credibility until AFTER he actually made the big move.

      (2) Powell’s defending not just credibility but the Fed’s political independence. Congress legally oversees the Fed, and so the Fed generally tends to move softly in the months prior to an election – to avoid perceptions that they threw the election. The chatter regarding September is for another relatively limited hike (0-1.0%). But the Fed will likely have much more freedom of action starting with its November and December meetings, and the elimination of forward guidance could be seen as a step towards “taking the gloves off”.

      • Einhal says:

        That’s just as bad, but in the other direction. It means that the Republicans (assuming they take over the Congress) will get blame for the recession.

        • VintageVNvet says:

          NO ein:
          DOES NOT matter one bit which of the so called parties, left or right or extremes of both ARE actually in ”power” in USA GUV MINT,,,
          NOT now,,, really and truly not ever since IKE IMHO:
          Both parties now SO sub servient to the Oligarchy because of the various and sundry ”findings” by courts,,, NOW ALL the courts that continue to allow ”stuff” and by stuff to be sure WE the PEONs know the real term,,,
          CLEAN HOUSE,,, SENATE TOO!!! was a very valid rallying bumper sticker for some of us back 40+ years ago who had seen the devastation and degradations from both of those parts of our GUVMINT,,, as both houses became SO sub servient to our Oligarchy then,,,
          And only for sunny,,, that was exactly when I got OUT of the stock markets because of the overwhelming ”control” of our SMs by the OLIGARCHY controlled Federal Reserve Bank.
          May have been always that way since Andrew Jackson, but that was my ”light bulb” moment after being IN and profiting nicely from SM.
          Came on WolfStreet to see if I could figure out how to invest better than I Bonds for my beloved spouse,,,

  2. WolfGoat says:

    10 year has been climbing over the last few days, but 1’s & 30’s are still inverted. You’ve stated that QT will take some time to bite. And bite it will!

    I guess all we get to do now is watch Mr. Market squirm until Sept. when the Fed smashes ’em again after the Jackson Hole extravaganza!

    • SoCalBeachDude says:

      The 10 year US Treasury yield (interest rate) is presently around 2.75 after dipping as low as 2.55 earlier this week and it is EXTREMELY VOLATILE at this stage. It was as high as 3.25% in July. It should be around 5.25% and is the single most important interest rate gauge and influence in the constellation of interest rates in the US.

      • SS says:

        Yes Fed is smashing markets with -6.6% (2.5% – 9.9%) negative interest rate. What a joke!

        • historicus says:

          SS….
          Yep…still record disparity between Fed Funds and Inflation….and no one seems to detect this, address it, or speak of the damage it causes. Or, call it arranged THEFT which is what it is.
          Formula driven monetary policy would have required that the described “transitory” inflation be met with immediate rate hikes.
          If the inflation had turned out to be truly “transitory” then the rate hikes would have been transitory as well…..and why not? But it is the subjective nature of the Fed that is suspect when it allows this spread between Fed Funds and inflation to be this wide.

        • phleep says:

          I guess the markets are getting the Orwellian doublespeak joke here: calling the bluff, playing chicken, blatantly. But it is their chips right now, not mine.

          I am long volatility. VIXY is close to its 52-week low today. What a weird world when this has me holding my breath and doubting myself.

        • COWG says:

          “ But it is their chips right now, not mine.”

          Don’t most of the chips in the “market” belong to other people, not the players who are trying to make money from OPM….

          The manipulation of which determines their fees and thus, their income…

        • historicus says:

          phleep
          Time is your enemy here…..being long vol…
          August slow time of the year in securities…..
          sideways likely
          good luck

      • Keppered says:

        Yes I give it until next to or next week and the whole yield will…..
        Duh…. stay the same. This is so easy it’s stupid.

    • sunny129 says:

      WolfGoat

      ‘when the Fed smashes ’em again’

      I am still waiting!
      Just words/rhetoric, but NO credible action.
      Bottom line: Mkt just doesn’t believe him.

      • SS says:

        Fed keeps talking about soft landing. It’s like a poker player saying, I hold Royal Flush, but I won’t raise the bet!

        • rankinfile says:

          It’s like the boy who cried wolf story.The market just doesn’t believe Powell has the sack to see this through.The market knows the fed likes using lip service perception and fear through words to do their heavy lifting.The market just doesn’t believe it anymore.Considering the debt load both private and public,I don’t see them raising much from here.

        • Wolf Richter says:

          Soft landing would be the ideal outcome, but they admit that they might not get a soft landing, but some other kind of landing, and that’s fine too. They’re going to do a landing, one way or the other.

        • DawnsEarlyLight says:

          A soft landing is akin to slowly pulling the knife out of our back.

        • El Katz says:

          A soft landing is nothing more than a controlled crash.

      • gametv says:

        This is what I have been saying. I would love it if Wolf would include debt balances in his discussion of Fed policy. I think that the markets are seeing very small reductions in MBS and Treasury balances by the Fed and as a result, they just dont believe them.

        I also would like to see some of the MMT economists on the Fed, like Kashkari, get booted off. How can the market believe the Fed wont go right back to QE when you have a bozo like Kashkari voting in the future.

        The Fed should announce that the board members that got it all wrong will be replaced and that the Fed understands that holding its own members accountable for failure will result in better results in the future. The best companies reward performance, why shouldn’t the government? If the Fed is supposed to be the world’s leading economic group, why would they ignore all the economic research that indicates that true competition is the most important factor in the health of an economy and that negative rewards for poor performance is part of what makes competition work so well.

        • Kenny Logins says:

          They’ve not failed though have they?

          This happens every cycle.

          Redistribution of wealth event.

          Simple solution, don’t be a bag holder.

          Prob best just holding 6 month gov debt at this point?

        • Nacho Bigly Libre says:

          Great comment gametv.

          Something to do with human psychology?

          Even after media got many stories wrong, people still blindly believe what’s published.

          Even after many great blunders of the Fed, people still believe the Fed is capable of and is willing to help them.

        • Flea says:

          They were held accountable,forced to resign for front running the fed . Had to resign ,should be in jail with restitution of funds made and penalties. I believe this is called CRONY capitalism

        • Wolf Richter says:

          gametv,

          Balance sheet update coming tomorrow when the balance sheet comes out that includes the July run-off. Last week’s balance sheet didn’t include the July runoff, which happens at the end of the month. So make sure you read it carefully.

          You should have already read the one a month ago:
          https://wolfstreet.com/2022/07/07/feds-qt-kicks-off-total-assets-drop-by-74-billion-from-peak-new-era-begins/

          I’ve been through this the last time the Fed did QT (and it was a lot smaller and ramped up more slowly than this one): it took the markets six months before it sank in, and then the markets cratered and the screaming started. This time, given that QT is twice as big and ramps up much faster, it might take three months.

          Markets HATE QT. At first, they’re QT deniers. And then they run for cover.

        • Wisdom Seeker says:

          Re “I think that the markets are seeing very small reductions in MBS and Treasury balances by the Fed and as a result, they just dont believe them.”

          I think it’s more that with QT going so slowly, the markets are stuck with mountains of excess cash that no one wants to hold at -9% inflation-loss rates, so everything else still has a bid just from that hot-potato effect.

          QT won’t get real teeth until it chews through the excess reserves, which at current speed is gonna take years…

        • VintageVNvet says:

          Dream on gtv, at least as far as having some realistic reckoning of the damage done by the ”FED” as it continues to serve its masters in the oligarchy who very truly OWN the FRB and ALL its subsidiaries, including, especially the so called banks as their clear puppets…
          Una will have more better than I describing these very very clearly ”’incestuous” relationships,,, but all of WE, in this case, clearly, WE the PEONs,, have SO much pain to continue to suffer because of the very very BAD policies of FRB helping the rich and richer at the very clear ”expense” of WE PEONS…

    • Old school says:

      Market seems to really be pricing in recession recently:

      Big inversion in treasury curve
      Oil under $90

      A lot of indicators are lagging and will peak during recession.

  3. libdis says:

    Fighting the FED will cost you money, fighting the market will bankrupt you.
    Unless, of course, its OPM.

  4. Brendan says:

    Powell is the boy who cried Wolf. See what I did there? I’ll see myself out.

  5. Peter says:

    “The Fed has spent years trying very hard to destroy, wipe out, annihilate, and incinerate its credibility as an inflation fighter.”

    And they continue to speak out of both sides of their mouths…why would the FED tell the markets that they expect rates to be around 3.5% at the end of the year with inflation at 9% (and we all know that number is a joke). Why transmit that rates actually won’t be that bad? Makes no sense.

    Why is the FED waiting another 2 months before raising rates “perhaps” 50 basis points? Why did Powell say rates are now about neutral?

    There is a MAJOR problem NOW and these guys are like a fire department screeching to a halt at a 4 alarm blaze and arguing about whether or not to throw 1 or 2 red solo cups of water on the fire.

    Sorry Wolf, their messaging stinks, their actions weak, and their reputation as inflation fighters non-existent.

    And that’s why the markets continue to ignore the FED. Ditto for the bond market.

    • Wolf Richter says:

      “Why is the FED waiting another 2 months before raising rates”

      The FOMC has been scheduling 8 meetings per year for many years. Meeting dates are scheduled and announced in the prior year. September is the meeting date that was set last year. They could do an inter-meeting teleconference to hike rates, and that would be a hoot, but they haven’t done that in decades.

      “And they continue to speak out of both sides of their mouths…”

      No, they’re now just speaking out of one side of their mouths — read the article to get the latest names to speak out of the one and same side of the mouth. The other side has remained shut. You and the markets are just imagining that something is coming out of the other side of their mouths (“wishful imagining). As I said, markets are delusional about this. But eventually, they’ll get it.

      • Venkarel says:

        Powell’s comments about a neutral rate and his comment on forward guidance seem to be the root of the problem. Wolf and others have explained that the entire term is long-term neutral rate which does not mean a neutral rate for the current short term (and yes on this time line a few years is short term) problem. As for forward guidance I will have to look up the context but I remember my reaction was not, oh the FED is giving up forward guidance.

      • gametv says:

        While it is true that members like Kashkari are now talking about tightening, the market just sees this as platitudes and doesnt believe that these members will ever really lower the hammer.

        Is there a mechanism for replacing Fed board members if they just are not believable?

        Everyone in the financial markets knows that Powell is just a tool. He isnt even an economist by training.

        Change the composition of the board and you would immediately change its credibility.

        • kam says:

          As an economist, a small hat I wear, among the many that I have, the fact that Powell isn’t an economist will save him many hands.
          Most of the Worldly Philosophers would never have considered themselves economists, just observers of people and their money.

        • rankinfile says:

          Too bad Bernie Madoff is gone.He had a lot of people hoodwinked.

      • Depth Charge says:

        “September is the meeting date that was set last year. They could do an inter-meeting teleconference to hike rates, and that would be a hoot, but they haven’t done that in decades.”

        And therein lies part of the problem – the FED isn’t treating the situation as an emergency, but it is. Just look at your CPI chart for services. If that doesn’t scream emergency, then I don’t know what would.

        The FED shows up in a day to rescue the stock market so that pigmen don’t have to endure paper losses, but once inflation starts destroying tens of millions, they just stick to dates set years before, without so much as a care in the world.

        • AK says:

          Very true.
          And markets see Federal Reserve’s no-rash attitude, and draw conclusion that good time can continue for some time.
          IMHO Federal Reserve should do something shocking to capture markets attention.

    • Ben says:

      Well maybe the Fed is right if bond and stock market would cooperate and read the memo. If markets would tighten a bit then maybe the end of year forecast rate is correct. We won’t know because of no cooperation at the moment.

      • kam says:

        There is a simple explanation.
        Way, way too much liquidity created by the Fed, and it needs to be mopped up.

        • gponym says:

          The bigger the pool, the faster you have to drain it if you want a quick drop.

    • JeffD says:

      Well said. When inflation is raging at 9%+, telling markets you expect rate to ultimately increase to around 3.5% is counterproductive, even if at that rate inflation begins to be forced down. There is zero sense of urgency in that Fed announcement, and they would have been better off leaving the upper bound open ended.

  6. historicus says:

    YOY CPI likely to read bullish in coming reports, and no Fed meeting in August.
    What do shorts have to look forward to in coming weeks?
    CPI will be spun to suggest Fed actions taking effect. Of course reporting inflation running at multiples to the Fed target range is still more damaging inflation….punishing the citizenry.
    Any inflation on top of the 9% spike is intellectually unacceptible.
    We await any meaningful effects of QT

    • JeffD says:

      Redbook just came out indicating inflation at 15% vs 12% last month. I wouldn’t bet on a fall in CPI just yet.

  7. Tom Jones says:

    I think it’s a game of chicken. Nobody believes the Fed anymore because it is political, subject to election cycles, etc.
    So, if the Fed is serious about crushing inflation “at all costs” a lot of damage will get done. Apparently the markets, now owned predominately by a select group of financial elites and institutions, have only had experiences with the Fed constantly bailing them out of loses, while allowing them to keep the profits, in their rigged game. So, the “at all costs” Is not believed, and with historically good reasons.
    Volcker’s Fed was in a different era, with a different national debt, different politics, and when oil became plentiful again, many think that was what brought down inflation as much as interest rates. The markets are correct to be suspicious of the Fed’s willingness to stomp inflation at the expense of the economy. Just the interest on the national debt alone, is increasingly unsustainable with rising interest rates.

    • WolfGoat says:

      Good points… Nov. is the mid-terms and I would suspect after that the Fed will accelerate it’s efforts to get the Markets to play nice.

    • MarkB says:

      Wouldnt the debt be locked into whatever the interest rate was at the time of sale? To raise interest rates now would have nil effect on the cost to service debt that was issued at a lower interest rate.

    • rankinfile says:

      Different debt loads and different demographics this time around.
      A lot of this debt is going to have to go away if we’re to have any kind of future.

  8. Asul says:

    The main problem for the FED with its credibility was in the “taper tantrum” sell-off in 2020, when markets tanked 30 %. After that the FED looked quite spineless … and now Powell is quite incapable of being credible.

    Well, Wall Street and the financialisation made Main Street irrelevant, so, as markets are the big generators of profit, it looks like the markets don’t care anymore.

    The FED should raise to 7 %, then markets will care again.

    • Einhal says:

      I don’t agree. It was the December 2018 pivot that killed the Fed’s credibility, because that was based on nothing other than stock losses.

      In March 2020, there was a big problem in that the credit markets completely seized up. It’s a problem when even good companies with solid cash flow can’t borrow money, but the way the Fed printed trillions in response was not the right way out.

      • historicus says:

        Einhal
        Agree. When Powell got Fed Funds up to meet the 2% inflation in late 2018, then was jawboned by Trump to drop rates, the Fed lost credibility. The ECB had rates negative at that time and that was a problem.
        All Presidents want stocks to rally in the term….
        The explosion of the money supply was over the top, and Powell is so slow to undo the error. Whimsical groupthink allowing such a magnitude of money supply increase is a flaw in the power of the Fed. Formula guard rails would have prevented.

      • phleep says:

        > the way the Fed printed trillions in response was not the right way out.

        Total fog of war, who knew how deep and long the freeze could be? It is what the Fed did SINCE then that showed incompetence and damaged credibility. The result is what markets are daring today.

        • Einhal says:

          No matter what uncertainties there are, a responsible Fed would never come out and say unlimited QE. You never want to promise unlimited ANYTHING.

          I do agree though, that it was clear by November and December of 2021 that the printing needed to stop. The fact that they continued for 15 more months is inexcusable.

      • Dan Romig says:

        Einhal,

        Personally, I would prefer that good companies with solid cash flow do not borrow money. Case in point would be Apple and their $5 billion bond issuance. What makes them do this?

        Unless a company that’s in good shape and bringing in cash is investing to expand or update equipment, the best plan of attack is to just keep making profit and pay out a dividend.

        • Einhal says:

          That’s just not the way the business world works. Companies hold all sorts of assets that can’t always be liquidated quickly, so having a stable credit line on which to draw is productive to everyone.

          The problem is that companies are allowed to borrow money to buy back their own stock. That should never be allowed.

        • Dan Romig says:

          Yes, having a line of credit is a positive. Not needing to use it and not carrying debt is best. Just my opinion.

          How much debt does Ford have?

    • kam says:

      “markets are the big generators of profit,”
      The Fed, mortgaging the future of the USA, is the big generator of profit.
      There would be no “market” profit without conjuring money and depressing the cost of debt (interest).

    • rankinfile says:

      It’s as though don’t fight the Fed has flipped to don’t fight the Market.
      tail meet dog

  9. SocalJimObjects says:

    The market’s not fighting the Fed. The market’s trying to suck in all those BofA customers flush with cash. Once they are in, the market will crash again. So predictable.

  10. SpencerG says:

    I agree that “You don’t fight the Fed.” But I do have some contrary views to what Wolf expressed here.

    1) I am not sure how well normal inflation-fighting tools will work THIS TIME. Inflation right now is largely a function of the supply-chain shocks at West Coast ports, Saudi cutbacks on oil production, and the war in Ukraine (hitting food and fuel prices). Raising interest rates really won’t make much of a difference to those situations it seems to me.

    That said, the Fed cannot just sit on its hands while inflation takes root. Moreover, they were ALWAYS going to have to engage in Quantitative Tightening to fix its Balance Sheet. No time like the present.

    2) I think that the Fed gets a bit of a bum rap for backing off the QT in 2018. They had a well thought out plan for fixing their Balance Sheet and it was working well for almost two years. But at some point they decided to add Interest Rate hikes to the mix and the markets didn’t know what to make of it. Plus it was causing some problems with the banks that I never really understood but that caused the Fed to put a halt on everything.

    Granted that it was the Fed’s own fault that they added the interest rates. It was like adding a series of Triple Axel jumps to an already winning skating program… it increased the risk without there really being an increase in reward. The economy wasn’t spurring interest rate hikes so why should the Fed do it? Just “heal thyself” and worry about interest rates after the Balance Sheet is repaired.

    Wolf (and others) say that the Fed backed off of QT in 2018 because the markets squawked… but the markets always squawk. I think the economists at the Fed simply aren’t as good as they think they are (e.g. “Transitory Inflation”) and fiddled with a plan that was working well… and when it stopped working well they shut the whole thing down rather than admit their mistake and make adjustments.

    3) Speaking of Fed economists not being as smart as they think they are… looking ahead, I am totally in the Larry Summers camp regarding the Fed’s 2% “target” inflation rate. The Fed’s economic models are seriously off if they think they can achieve a soft landing while getting inflation back that low.

    • sunny129 says:

      SpencerG

      “Wolf (and others) say that the Fed backed off of QT in 2018 because the markets squawked… but the markets always squawk’

      Exactly!
      Cannot afford to shock the mkt, right? So baby steps in raising rates and QT on the snail pace!
      Fed is clueless and there is NO will power there, like Mr. Volcker. Just words and rhetoric!

      • Wolf Richter says:

        IN 2018, INFLATION WAS BELOW THE FED’S TARGET. Why is that so hard to remember, dudes?

        Now inflation is three times the Fed’s target.

        Quit comparing 2022 to 2018. This comparison is idiotic.

    • Apple says:

      The housing market is already cooling.

      • ru82 says:

        Things are definitely cooling. It appears as if demand is dropping for most things except for the stock market. But it was a bit oversold. Some stocks that are down 70% and make money, are actually tempting.

        I read a story that said plastic resin prices are spiraling down and could drop more because of the expectation that prices will keep dropping and thus one should wait to buy. That is deflation spiraling which nobody wants. That is also something the fed wants to avoid happen in other areas.

        • The Real Tony says:

          The stock market hasn’t been oversold since the fall of 1982.

        • gametv says:

          I really think that the fear of deflation are overrated. What has been happening over the past decade is that technology has been a deflationary force, and the Fed has dropped interest rates to stimulate the economy in the face of that deflation.

          But the deflation from technology innovation generally leads to more efficiency (when anti-monopoly policies are enforced). So consumers get more value for their dollar.

          Why is that a bad thing for consumers?

          Deflation is bad for corporate profits, but are we really concerned about corporate profits? If companies that cant compete because they are managed by luddites lose profits, isnt that a good thing that will move revenues toward more efficient competitors?

          The real problem that causes this big wealth gap is that we keep trying to prop up the dinosaur companies and monopolists, instead of increasing competitive pressures.

          And if you are willing to extend the argument even further, is greater consumption of goods and services always a good thing? It causes us to increase our consumption of finite resources.

          Which world would you rather live in:

          1. Today’s world where asset prices are high, the cost of healthcare and higher education and real estate are ridiculously propped up by government policies and cheap money.

          or

          2. An economy of ruthless efficiency where prices spiral down because of highly efficient competition. Healthcare costs plummet as the legal foundations that prohibit true competition in healthcare are eliminated, housing prices plummet as interest rates are much higher and the government stops funding higher education leading to massive plunges in the cost of higher education, allowing the middle class to once again afford the education that can only be afforded by the rich and poor (due to financial aid).

          I choose the later. And highly efficient companies that deliver great value to their customers will do just fine in this second world, even with deflation. The same way that highly efficient technology companies do very well.

        • rankinfile says:

          Don’t be fooled.Look at charts that go further back.This bubble has been blowing a while now.The market is by no means cheap.
          Some of those companies only existed with 0 interest and loose money policies.They have no place in a normal (or as close to) interest environment.

      • SpencerG says:

        House prices may be cooling… but I am not sure that rents are.

        Gas prices are certainly cooling… but that has more to do with high prices forced Americans to conserve… down 6 to 8% year-over-year according to the EIA.

        And I see no letup in prices at the grocery store.

    • Happy1 says:

      Inflation is not a supply chain issue, it is as it always has been and always will be, an issue of a large increase in money supply and artificial low interest rates encouraging borrowing and speculation. Supply chain is a very minor issue.

      • Wisdom Seeker says:

        The monetarist “always and everywhere a monetary phenomenon” is incorrect/incomplete. That’s demand-side thinking … but supply levels also influence prices.

        Three examples:

        1) Gasoline supplies are down about 10% from 2019 levels. So of course prices are higher.

        2) Chip supplies for autos are down, so auto production is down, so of course prices are higher.

        3) COVID and the related policy responses took a bunch of people out of the workforce, creating an historic labor shortage. So of course the remaining workers are demanding and receiving higher pay.

        • rojogrande says:

          Price spikes don’t necessarily cause inflation though. Oil was very expensive for a sustained period from 2010 to 2014 without triggering CPI inflation. Supply can certainly influence prices of particular commodities, but maybe to get generalized inflation you also need what the pandemic provided: massive QE and helicopter money in conjunction with price spikes once the lockdowns were lifted.

          I’m trying to figure out why inflation took off now but not with earlier price spikes. Inflation seems to need a monetary component to take off, but perhaps I’m missing counter-examples.

  11. zeek693 says:

    Wolf,

    Have you ever written about corporate profit margins’ impacts on inflation? Obviously the Fed needs to lower demand, but perhaps that side of inflation is not discussed enough.

    • Wolf Richter says:

      zeek693,

      Discussed many times.

      The “inflationary mindset” has set in – which I have been yelling about since Feb 2021. This inflationary mindset has infected consumers and businesses alike. It means that consumers and businesses are paying whatever price. That’s HOW you get inflation. A related aspect is “inflation expectations,” that the Fed talks a lot about.

      Part of inflation is psychological: the willingness by buyers to pay the higher prices. And that is now happening.

      This willingness to pay higher prices needs to be broken. You break it by triggering an economic slowdown, where demand vanishes and people lose their jobs and companies fail.

      Businesses will always charge the maximum price that the market will bear, given their sales expectations. Price resistance is on the other side. So if this price resistance vanishes, as when the inflationary mindset kicks in, then businesses get away with raising their prices and not take a hit on sales.

      People like Warren that are blaming “greedy” businesses for inflation are clueless about business and clueless about inflation. They need to blame consumers. Inflation would stop this minute if consumers went on a huge buyers’ strike, thereby collapsing demand (big-fat recession). And inflation would come down. The Fed is now trying to push consumers into a buyers’ strike. And eventually it will succeed.

      • Abomb says:

        I can say based on my professional experience that the inflationary mindset has definitely set in. When contractors and suppliers for heavy civil infrastructure only hold quotes for 3 days or in some cases just tell you that they’ll confirm pricing after equipment ships what hope does anyone have to control costs. Contractors are also turning away big projects and not even bothering with bids because they’re too busy so the few bids you do get are generally inflated bc that contractor is also too busy but they figured why not throw out a big number and see if they get lucky. It’s insane. And just today another contractor saying that lead times for major electrical equipment are getting longer every week. Most major electrical equipment is now 52 weeks out. The only way this gets fixed is to change the culture and force a recession. The market fighting the Fed is scary

        • Flea says:

          This is what happens when companies outsourced manufacturing. To overseas companies,now there’s no products because we pissed off china .12-14 year problem ,most likely will be a huge WAR

        • rick m says:

          As plant electrician in the teens for a shrimp packer in a tertiary market, I bought a lot of used transformers, switchgear, and fiberglass and stainless enclosures from a reliable supplier not far away in South Alabama. Overnight, cheaper and guaranteed, I spent tens of thousands and never had to return a thing. Lead times on new electrical equipment were getting a little problematic even then, but I could still buy a new 225kva dry-type stepdown transformer for five or six grand and get quoted eight weeks delivery and it would typically show up in a month. Now it’s a year, and they mean a year. Nobody can plan under these supply conditions. Inside sales at supply houses are compensated on a commission basis and they bill it as quickly as possible. They were getting by but not getting rich before this. These kind of lead times are going to have a bad effect on purchasing managers budgets, stretching across accounting periods. 2ten/net30 won’t fly with deliveries scheduled farther and farther into an uncertain future. And lately, money costs real money.
          Electrical contractors usually can’t install or warranty used equipment, but they may have to get accustomed to doing so if new product is a year out and used is available. There’s still no Romex at Lowe’s or bracket boxes either. Lots of holes in the circuit breaker display, many are made in Mexico and had production hold-ups. Some GFCI breakers are unobtainium.
          But the price of copper now is under what they paid for #2 copper wire scrap a year ago. A year from now, the electrical shelves will be full and reasonably priced, and everyone will be gun-shy. Never fails.

      • Einhal says:

        The thing I don’t understand though is why the businesses profits are going up so much, even with the inflationary mindset, as the prices they pay for THEIR inputs have gone up based on the same inflationary mindset.

        • Wolf Richter says:

          Actually, profits are now taking a hit. See Apple and all the others. But that’s the thing about the inflationary mindset: it spreads to everywhere. And it is really hard and painful dislodge, as we will find out.

  12. historicus says:

    Markets are never wrong. They are where they are for the reasons at that moment. They are the definition of what ‘”is” is. Margin departments will tell you this also, and insist.
    However, markets spend very little time at levels that are not warranted…forces reject the level and seek a new one.
    That is a small distinction but an important one for speculators and traders.

    • sunny129 says:

      historicus

      “Markets are never wrong’

      That was true under our good ole, genuine, Free Mkt Capitalism but NOT under Crony Capitalism, where CASINOS are being managed Fed’s constant intrusion. Price discovery is suppressed unlike before ’09. Feed back mechanism is distorted. Animal spirits and investors sentiment ruling the mkt.

      • JeffD says:

        It’s not a casino when you always take home winnings. That’s how you know it’s a managed market, not a free one.

      • HowNow says:

        Sunny and Historicus, as it turns out, markets are never right. And there has never been a “free market.” So, put that into your pipe and smoke it. The free market that we need to return to is on Pluto.

        And even though there is “Volcker worship” now among all commenters, the truth is that when Volcker finally got to raising rates dramatically (he didn’t initially) he was outright hated. Since the gravy train was being stopped, everyone and their brother hated Volcker.

        It is what it is, it isn’t what it isn’t, whatever, git er done, oh well…

    • rankinfile says:

      Buy Backs remedy much of that

    • Wolf Richter says:

      historicus,
      For years here, you hammered on the Fed for its interest rate repression and QE. And now that the Fed is jacking up interest rates faster than anyone expected, feared, or hoped just six months ago, and now that it started QT, you changed sides and are now rooting for the tightening deniers.

      I understand that there are bloggers and people like that, no matter what the Fed does, they will hammer on it. But it’s just silly over the longer term.

      “Markets are never wrong” is a braindead comment. Why do you get spikes and crashes? Because “right” and “wrong” don’t apply to markets. Markets do what they do. They’re driven by mass psychology (“greed and fear”) and over the longer term also by liquidity, which the Fed is now removing.

      • historicus says:

        “They are where they are for the reasons at that moment.”

        My comment didnt mention the Fed. I spoke of markets in general.
        And the reality of “mark to market” and margin calls from the margin dept.

  13. w maddox says:

    j powell – probably been said before – deer in the headlights

  14. ru82 says:

    Commodity prices have crashed the past 2 months. Many are back down to pre-2022 prices.

    That should help decelerate future inflation?

    Wheat down 40$
    Corn down 30%
    Copper down over 30%
    Cotton down over 30%
    Oil down 30%
    Soybeans down 30%
    I read Plastic resins are in a downward spiral
    Lumber down 70%.

    Just thinking out loud but this will help drop input prices.

    The FED might have been right about some things were transitory. Many commodity inflation is appearing to be somewhat transitory.

    I read the pause on people buying houses has actually caused rent prices to go up as the demand for rental has increased as more people choose the rental option. Thus maybe that is why home builders are also turning new subdivision into rentals for the time being.

    • Venkarel says:

      The point I got from past Wolf articles is that inflation is going up (or staying high) even with commodities and durable goods price decreasing. The reason is serious inflation has now taken root in the service sectors.

    • Seen it all before, Bob says:

      The question is, what is causing commodity prices to drop?

      1) Supply chain improvements? Transportation, etc?
      2) More supply due to ag improvements/manufacturing?
      3) Less demand?

      If they continue to drop, then inflation will drop.

      Some producers in the chain will try to hold their high prices with huge profits, but with capitalism, a competitor will appear willing to take less margin. It takes time.

      The good news is we will not all starve to death and experience the end of the world. The bad news is that some stickiness in prices will prevail and we will not get 2018 prices.

      • Flea says:

        Drought,fertilizer shortage high fuel .Doesn’t look good for food production. This could be a repeat of early 80 s farmers paying 15-17 k a acre doesn’t add up to profit. Gates better put on his Superman cape,to save the world

        • Seen it all before, Bob says:

          Wheat is down, Corn is down.

          Does that mean there is a great supply of both?

          Or, does it mean people are eating less wheat and corn?

          I think it is the former. Supply chains are fixing themselves and demand has stabilized.

          This is an early disinflation sign. As long as they stay down and are not affected by drought, freezes.

          Fertilizer and oil prices are also down during the last few months.

    • DawnsEarlyLight says:

      Whoopee! What about pre 2020 prices?

    • JeffD says:

      Commodities still 40% higher than pre-pandemic, but yes, moving in right direction.

  15. Martino says:

    You never mention the effect of years of
    “Forward Guidance”. …an attempt to fool and jawbone what they hoped constantly to not do….stop printing and raise rates.This
    is liars poker and has trained the markets
    to become “kremlinologists” of Fed speak.
    As for the Fed doing even a semi Volker,
    in the present conditions of universal debt
    overhang…public and private. .there is no
    escape either from hope projection or
    real action as postulated by Wolff to
    avoid the coming crash…as cost and
    consequence.

  16. Jake Bodhi says:

    In ’82 my contracting business and myself were taken behind the barn and shot. It was murder. There.was.no.money. I had to hitch hike across the country to another city with a counter cyclical economy and go to work for the stage hands union which was doing well. I told a friend this story and his response was that I must feel resilient and confident. No, I replied, I feel that it can happen again!

    • Halibut says:

      In summer of 1978, a few months shy of my 18th birthday, I rode a greyhound bus to south Louisiana. There were “no help wanted” signs all over the country, but they had jobs in the shipyards down there.

      I lied about my age and I lied on my application. I said I had worked in a boatyard in Duluth Minnesota. It got me a job.

      I wasn’t all bad, but I did do some work I wouldn’t wish on my enemies.

      So, yeah… I hear ya.

  17. unamused says:

    Mister Market isn’t stupid. Mister Market knows perfectly well The Fed has been levitating ‘the economy’ on cheap debt since 2008 because it had to do it to save the TBTF banks that got in way over their heads and were about collapse the whole house of cards.

    ‘The money-printing binge that started in 2008 has turned the Fed into a money-printer, not an inflation fighter.’

    And that’s not going to change, because the causes of the 2008 disaster have never been resolved.

    ‘In the press conference on Wednesday, Powell said that the Fed, “wouldn’t hesitate” to hike rates by a full percentage point – so by 100 basis points – if needed.’

    Do tell. The Fed has been hesistating for years.

    It’s not enough to state that Mister Market is doing this and that and The Fed is doing this and that. One must also explain why, and the reason is financialization of the economy. Consumers can’t spend their brains out without debt, and neither can corporations, and neither can the government.

    Debt is increasing faster than GDP because that’s how the Financial Industrial Complex has to make money because the Real Economy is bumping up against Real Limitations and can’t produce enough profit to feed the FIC in the manner to which it has become accustomed.

    Raising interest rates enough to contain inflation just puts the FIC back to 2008 and crashes both the economy and the FIC, so The Fed can’t do that. To preserve the FIC, its true constituency, The Fed is stuck with recession and high inflation because it knows, and Mister Market knows, that there is no other way to kick the can down the road. At least what’s left of it, and that’s a gravel track leading off into the weeds.

    • sunny129 says:

      unamused

      “reason is financialization of the economy’

      SPOT ON!

      • unamused says:

        Debt is growth. You can tell because debt increases spending, which increases GDP, and GDP simply ignores the debt.

        A balance sheet listing only assets and no liabilities will make the owners feel rich right up to the time they go bankrupt.

    • phleep says:

      Powell: who are ya gonna believe, me at this moment of resoluteness posing, or the numbers for the last few decades?

  18. nsa says:

    “What is past is prologue”……Bill Shakespeare.
    So delving into the FRED chart superimposing FFR onto YOY CPI reveals:
    approx year of FFR rate rise start duration of rate rise
    1967 2 yrs
    1972 2.5 yrs
    1977 3.2 yrs
    1987 2.5 yrs
    1994 1.1 yr
    2005 2.1 yrs
    2016 2.1 yrs
    March 2022 ?
    Conclusion: we can reasonably expect at least 2 yrs of FFR rate hikes i.e. FFR peaks March 2024 or later. A lot can happen in 2 years.
    Best Guess: the PTBs quickly take the FFR up to 4% or 5% and leave it there until inflation abates.

  19. Swimmer says:

    The Fed’s measure of inflation is the Core PCE. To get inflation down to its 2% Core PCE inflation target the Fed needs to reduce inflation in the components of the Core PCE. Stocks and bonds aren’t components of the Core PCE, therefore the Fed’s efforts shouldn’t be directed at the financial markets, as they will not achieve their goal until the total components of the Core PCE reach their 2% goal. Since the Core PCE is their measure of inflation, it seems the components should be more widely known and discussed.

    • sunny129 says:

      Swimmer

      If the demand for CREDIT is ‘aggressively’ curbed, it will affect all including Mkts. Without Fed’s insane credit creation since ’09, this bull mkt wouldn’t exist!
      Mr. Powell is unfortunately NOT Mr. Volcker.

    • Wolf Richter says:

      A crash in the financial markets will reduce demand by a lot — that asset bubble was one of the causes for the excess demand. And by reducing demand from the big spenders, overall demand comes down, and inflation loses some of its fuel.

  20. Xaver says:

    Volcker was fighting inflation and Powell is pretending to fight inflation. They represent different worlds.
    The market liked Powell’s comments about neutral rate and potentially lower rate hikes. A lack of responsibility. We are used to it. Any soft talk will extend the waste of capital.

    • sunny129 says:

      Xaver

      “Volcker was fighting inflation and Powell is pretending to fight inflation’

      Exactly!
      Lack of responsibility, will and incompetence

      • unamused says:

        “The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings.”

        Paul Volcker, September 1999

        • Don Miller says:

          He confuses the word economy with finance. Those are different things. The dollar only matters for international trade. Most countries will be fine without it, and if not they have overextended and need to shrink to their real size.

    • Seen it all before, Bob says:

      Xaver,

      “Powell is pretending to fight inflation.”

      I am not a conspiracist but I believe inflation is part of the plan for a soft landing.

      Compared to 2008 housing crash:

      Inflation may eat away 20% of a 30% gain in house prices during the last 2 years. Even with a 10% housing drop, the mortgage holder may effectively lose 10% of the value of the house in real dollars but the housing bubble has then deflated 30%. Their mortgage payments are constant and their 20% down payment will not cause a panic sell or a foreclosure. They may even switch jobs for a 10% wage increase.

      2008 did not have the “benefit” of high inflation, so a 30% drop in house prices, job losses, and wage decreases caused widespread panic and foreclosures.

      I think the Fed is using inflation to deflate bubbles without widespread panic. They don’t want inflation to end too quickly. They are using inflation to drain all of the excess pandemic cash flooding the market.
      They don’t want a recession with massive job losses, foreclosures, and deflation like in 2008. The banks don’t want that, so they don’t want that.

      • Depth Charge says:

        “I am not a conspiracist but I believe inflation is part of the plan for a soft landing.”

        Of course it is. It’s their “let inflation run hot for a while” plan, they just renamed it.

        • historicus says:

          “I believe inflation is part of the plan for a soft landing.”

          You’re part right.
          Inflation is part of the plan….period.

      • gponym says:

        Sounds plausible, easier to believe than most explanations I read.

        Is there any hope for those who aren’t market jockeys, or have job market halos? Inflation is certainly reducing my prospects as a retiree for a “soft landing.”

        • Seen it all before, Bob says:

          What can a retiree do?

          Some of my ideas as I approach retirement:

          If a retiree is on Social Security or a pension that has inflation Cost of Living increases, then they are somewhat protected.

          Large Cap value stocks should remain stable and eventually at least track inflation. Some energy stocks are paying 6+% dividends.

          I’m watching 10 and 30 year bonds. If their interest rises to 6% or higher, I’m going to invest. I think a 6% ROR will be higher than inflation within a couple of years and will provide a good retirement income. I’m already in as much as I can on 9.1% IBonds.

          If a retiree owns a house, they are mostly protected. Hopefully, if they still have a mortgage, they refi’d at less than 3%. I know a few retirees renting out a room or adding an ADU and collecting a nice rent for additional income.

          Wolf’s list of growth stocks with no profits and crypto are not a safe places for retirees (or anyone) IMHO.
          The DotCom bubble postponed many of my older co-workers’ retirements at the time.

    • historicus says:

      Volcker’s Fed NEVER promoted ANY inflation…
      The “new Fed” since 2008 promotes inflation (2%) …..and let’s hot inflation run.

  21. Peter says:

    If the FED wants the markets to listen…raise rates 100bps TODAY… investors need a kick in the butt to take the FED seriously.

    Based on past experience, I don’t think the FED will do it and the longer they wait, the worse this situation gets… just wait and see what happens if the inflation print is under 8.8%…rocket ships will have a tough time catching up to this market…

    • Flea says:

      Seems like China warned fed not to raise rates to fast 4-5 months ago .Tells u who is really in charge

      • Francis Lunenschloss says:

        China is not in charge of the world yet. They may be someday. Do not get your dual citzenship now.

  22. sunny129 says:

    Yesterday, I mentioned that the power of perception is exceptionally strong in spite of 3 FOMC members speaking decidedly hawkish!
    Mkt/investors doesn’t trust Fed.

    • unamused says:

      “Mkt/investors doesn’t trust Fed.”

      I trust The Fed to do the wrong thing for the wrong reasons and to do the right thing for the wrong reasons, because those reasons will always be in the interests of the Financial Industrial Complex, to the exclusion of any other consideration.

      I trust The Fed completely, and it has never let me down.

      • sunny129 says:

        unamused

        Been in the mkt, following the conventional rules under the old system but that (Free Mkt Capitalism) was murdered in day light in the March of ’09.

        Instead usual business cycles, Fed substituted ‘credit’ cycles unlike any time in the history of Fed. Built this 3rd ‘everything’ bubble using credit/debt as a cure to their mistakes, which brought us GFC. Problems which got us GFC, NEVER got addressed but covered with more debt!

        If this is the Fed, you trust. good for you,
        For me, this is the most wreck less Fed(just like Mr. Wolf) in the history of Fed. History will decide.

        • unamused says:

          “If this is the Fed, you trust. good for you”

          I didn’t say it would be a positive experience.

          There is no such thing as ‘free markets’. Either they are dominated by the biggest players or they are regulated. Either way they are not ‘free’, unless one equates ‘freedom’ with the freedom to pillage.

          “History will decide.”

          History doesn’t decide anything. It’s just a record of the past. If it decided anything civilization might have a future, which has been plundered so badly by the past and present that there really isn’t much left, and what little will remain is likely to be a disappointment.

        • sunny129 says:

          unamused

          I know that there is pure ‘free mkt’. Been in the since .82. Gone thru more than 1 bear

          -Fed never bought MBSs in it’s entire history until ’09!
          -QE had no prior research or record but came straight out of seat of pants of Barnake
          -Fed had never suspended the Mkt to Mkt accounting standard any time before?
          – Persistent ZRP+QEs+ twist and multiple stimuli – NEVER before!

          DEBT of all or any kind are at record peak levels, unlike any time in the history of mankind. Reversion to the mean is as natural as 4 seasons, which can be delayed but cannot be banned.

          Yes, I am still invested with 40-50% cash, long but with hedges trade leveraged ETFs and options. Coming bear will be unlike any other
          Good Luck.

        • phleep says:

          > March of ’09

          I took an incredible loss. Bernanke took me out and shot me. I guess the consolation prize was all this funny money era.

      • sunny129 says:

        unamused

        I was here when Mr. Volcker was the Chairman of the Fed. He contained the inflation by raising the rate almost 20% to beat down the inflation of 15% . It took nearly 18 months and inflation came down to 5% and again below.

        In the late 70s, P/Es on stocks were in the single digits, and debt levels were negligible. Today, valuations are nearly four times those levels, and debt as a percentage of GDP is at levels considered unthinkable not that long ago. As we wrote earlier, Fed monetary policy is much more influential on economic activity because of the enormous reliance on debt and interest rates. Accordingly, their policy actions and direct and indirect effects on liquidity greatly influence asset prices.

        The Fed is in the driver’s seat, and its reaction to inflation will dictate market returns.

  23. THEWILLMAN says:

    The fed is talking about softening the labor market when inflation is way outpacing wage gains and savings rate is at a decade-plus low.

    An honest media would be covering that way more than Pelosi’s trip to Taiwan. Glad to see reporting on that here (even if Wolf is in favor of squeezing labor – credit is warranted for having the courage to discuss that directly)

  24. Brewski says:

    It will take a huge dose of intestinal fortitude aka guts for the Fed to do what is necessary in reversing the inflationary spiral.

    Not to mention Congress’ total lack of discipline. Massive spending programs will continue to be monetized as debt increases.

    We’ll see. But, my guess is that the Fed will move the target.

    Cheers,

    B

  25. SoCalBeachDude says:

    THE NEW REDDIT MEME STOCK GRAND LOTTERY MEGA-WINNER!!!

    MW: AMTD Digital is worth more than 480 of the S&P 500 companies after stock rockets over 3,000% in 7 days…

    • Wolf Richter says:

      Check the price, and don’t just post outdated headlines. Since the peak yesterday at 1:30 pm, the price has collapsed by well over half, in just one trading day.

  26. Lawrence says:

    The deep inversion of yield curve tells us you are correct.

    The balance sheet hit a high of 8.965 Trillion back in April as of 7/27 it was 8.89 Trillion. QT – yes technically , but if the FED really wanted show they meant business the could start to sell bonds and run yields up on the longer end and tighten things up quite a bit.

    • WolfGoat says:

      Is there anything that would force them to do this? I’ve heard a lot about QT, but as you point out, it’s more like ‘Quantitative Trickle’!

      • Lawrence says:

        IF inflation stays the same or even increases from here then yes , I could see the FED accelerate QT.

        The common knowledge seems to be that the FED will buckle as Wolf wrote , I must admit I am in that camp myself , the fact that they are so beholden to the markets makes doing what they need to do impossible.

  27. Ed C says:

    Is programmed, i.e. algorithmic, trading a big part of this market fighting the Fed? Asking for a friend.

    • sunny129 says:

      Ed C

      I have adopted ‘swing’ trading using 3x long vs short leveraged ETFs in my IRA acct. At the end of day I decide to sell long nearly 80%. B/c the power of perception is much stronger than the reality under this feckless Fed, which has lost it’s credibility. Volatility is contained and my portfolio remains close to neutral over the last 3 weeks. Been in the mkt since ’82. This needs a close watching, which many cannot do (I am retired) My slant is bearish but with hedges.

      This is NOT for every body.

    • Lynn says:

      IDK, but I am also wondering if Chinese citizens are a big part of the US market as well. Directly or indirectly. There has been a lot of capital flight from China, even if it might be slowing down now. I think in China there might be an even bigger expectation that government in general will bail people out.

  28. patrick says:

    we don’t need no stinking markets ! I don’t check “the market” every day – but I did check today explosive move up ! all is right and the spending can keep on unstopped by any thing or anyone ! when will there actually be a “recession” last one was what 14-15 years ago? and this is no recession – the spending out there is spectacular – I sat at my favorite coffee shop on the patio and watched fleets of newly licensed -bmw-lexus- tesla- mercedes – roll by with people who young and beautiful and clearly WFH !

    • Arya Stark says:

      Hell of a day to release this transcript.

      • Wolf Richter says:

        Arya Stark,

        Yes, it was a perfect day. YOU and most everyone commenting here ABSOLUTELY AND TOTALLY PROVED MY POINT, almost hilariously. These comments prove that I TOTALLY NAILED IT with this article, on THIS day. Those comments are precious!!

  29. Not Sure says:

    If the Fed wanted to get their message across, they could do it in a heartbeat. They could omit any calming language in their jawboning right away, none of this “neutral rate” or “soft landing” BS. They could kick the stock market’s teeth out in a matter of hours with an intra-meeting hike by an amount that actually means business. They could speed up QT instead of following it’s current anemic ramp-up. They could sell MBS. If the bond market still doesn’t want to cooperate, they can force the yield curve wherever they want it by actually selling bonds at whatever maturities they deem appropriate.

    In reality, the Fed has a lot of power. But instead of using it, they keep talking their game while making these timid little jabs in comparison to the massive scale of the problem. Powell and the Fed Governors can come out and say whatever they want, but the markets are not going be shocked until the Fed actually DOES something shocking. There was simply too much money created too quickly and it’s looking for a place to land. That will continue to be a problem until either prices rise to meet the new lower real valuation of the dollar, or until the Fed takes a meaningful number of dollars back out of the system.

    • Flea says:

      Central banks are a worldwide organization,they coordinate money policy,as a organization.There is no independence

  30. SC says:

    Yesterday on Bloomberg radio, a professor (didn’t get his name or school, but he’s been around a long time) challenged The Fed’s 2% inflation target stating it was arbitrary and maybe the target should be 4 or 5% to sustain growth.

    Hard to play this investing game when someone keeps moving the goal.

    • sunny129 says:

      SC

      2% was selected out of thin air without any prior record or research. Just amazing. At this point, attaining 2% inflation rate is delusional!

      • historicus says:

        Why would/should the Fed promote any inflation, ever, and especially after a 9% spike?
        If their target was 2% a year…..then their target now should be a 5% rollback in inflation……curious that it is not, isnt it?
        Seems they have accepted the spike, and are laughing up their sleeve.

    • phleep says:

      I have been waiting for the announcement that the Fed will adjust its inflation target upward. That would be the way to retreat, capitulate to inflation and market frenzy and financialization industries, and still look professorial and quantitative, calm and in control.

      But I think that would be a huge roll of the dice on the future. It would be “burning the furniture” for the sake of appearances (temporary social stability), and coddling the spoiled class more. By then, the wizards and shell-gamers could buy their islands and retreat there.

      • Einhal says:

        The problem with that is that it’s a tool you can only use once. Once you move from 2% to 5%, then there’s nothing stopping you from moving to 10%.

        That would kill whatever credibility the Fed has left, which granted, isn’t much.

        • Jackson Y says:

          Much of Wall Street thinks it will be done unofficially, because formally raising the target would damage their credibility & cause political backlash.

          Instead, most likely scenario is inflation backs down to a still-elevated but more politically tolerable 3-4% PCE, and the Federal Reserve pivots. It’ll be even politically easier if the economy has taken a hit by then.

          It’s a lot easier to swoop in & save the markets when “INFLATION AT 41 YEAR HIGHS” headlines aren’t blaring on TV every day.

        • Wolf Richter says:

          Jackson Y,

          This thinking is so delusional, it’s hilarious. The kind of ridiculous BS people come up with to hype and pump the markets is just funny. I should collect this stuff for a collection of Wall Street Humor.

    • Wolf Richter says:

      SC,

      There are people who will promote anything, no matter how dangerous or braindead. If Bloomberg TV gives these effing morons a platform, stop watching Bloomberg TV. That simple.

  31. Circa 2016 the Fed was trying to tighten credit, while global levels of liquidity were robust. They’re in much the same place here. Fed cuts off JR.s allowance and Uncle Bob slips him a twenty. The strong dollar has made the relationship with offshore money even more solid. The domestic solution would be more QE, or rollback QT. Economic requires new jobs to replace goods currently made offshore, which are vulnerable to supply chain disruptions. The Feds strong dollar policy is antithetical but their actions suggest plenty of cheap imports, and that puts a band aid on consumer inflation. The Wall St rally happens when they give up on valuations as a metric for stock prices. Two things: yes they have, and yes the new money is flowing into this market. Stocks can rally, and the sky is the limit. And they are buying everything, to make that point. Then like now, the market is good with rate hikes until EFFR reaches critical mass, as it did in 2018/19… You could see the money flows shrink in 2018, nothing like that is happening now. So the Fed isn’t tightening, and growth takes a pause while the high dollar prevents new goods for export and the labor market is already tight. So is Wall St fighting the Fed? No the Fed is not fighting Wall St, and policy is being circumvented. On the matter of bond yields the Fed is winning that war.

  32. boikin says:

    I just read that treasury had underestimated their tax collections for 2022 and are going to have to issue 262 billion in new bonds over earlier estimates. I am not sure how accurate that news is but it seems to me that bond rates are going to have go way up to accommodate both extra sales and QT. Am I correct in thinking this or this nominal difference. I like how 262 billion could be a nominal difference.

  33. sunny129 says:

    UNBELIEVABLE!

    Content deleted by Wolf. See below.

    • Wolf Richter says:

      sunny129,

      Content deleted by me. I knew you would drag this manipulative taken-out-of context quote from ZH into here. Go listen to the whole interview, the whole thing, including the part that follows this quote, you will see! ZH is polluting your mind. Fine with me, but don’t drag this manipulative toxic BS into here.

  34. Lune says:

    Wolf-
    What do you make of this article:

    tl;dr about $1tril has moved from bank excess reserves into Fed reverse repos in the past few months. This likely represents depositors moving their cash into money market and treasury accounts, now that you can get meaningful interest on your money.

    But it also means that there is still at least a few trillion in excess money parked and ready to come into the market when the time is right. If enough people believe that the Fed is bluffing, those trillions might flow right back into stocks and houses, and it won’t actually come out until the Fed’s QT finally makes a dent in those excess trillions floating around.

    IOW, perhaps the market can stay irrational longer than the Fed expects!
    (I won’t say longer than the Fed can stay solvent since, well, a central bank can’t go bankrupt, at least in the way we normally define bankruptcy…)

    FWIW, I think the Fed should probably do a one-time (or short-term) ultra-aggressive QT, and rapidly remove 500bil to 1tril in the span of a couple of months, just to drain some of this excess liquidity that’s just sitting parked anyway. It won’t affect the real economy, but will remove some of the “dry powder” that people are using to fight the Fed.

    With the flat yield curve, they have very little room to increase short term rates more without inverting the curve; they need to be more aggressive with QT to drive long term yields higher.

    • Wolf Richter says:

      I didn’t and I’m going to read the article that you linked. But to respond to the URL, reverse repos are not a headache for the banks.

      I agree with you: they do show to what extent excess liquidity is still sloshing through the system. QT will remove it. Yes, this will drag out for years, interest rates will be a lot higher than anyone expects, and QT will go on for years. The Fed has created a monster, and now that monster is eating the US economy, and everyone can see it, and the Fed is acutely aware of it, and the Fed is going to bleed that monster, but it takes time.

  35. Ling says:

    I might be wrong but the markets are not fighting the fed – this is just a narrative to satisfy the current behavior in the stock market.
    The market dealers couldn’t continue to let the market go down (reversed mid June otherwise looking at 3200 by end of June) so they sold vol and had the stock market go up. This is creating a huge imbalance (spreads being blown out) which will revert and revert hard. At that point the narrative will be that the market was punished by the Feds with a mid conference 50bps hike and bingo Feds have regained their credibility.

    • historicus says:

      The most essential consideration…
      The Fed STILL has rates at near record levels BELOW inflation.
      9% inflation and 2.5% Fed Funds is a laughable response……
      “We’re keeping a close eye on it”, etc etc.
      Telegraphing rate hikes through the WSJ, doing no rate rises “on the fly”…..foot dragging.
      The Fed is remiss, and the markets sense it. IMO
      Understand that the Fed welcomes these current prices….12 months from now…..with a few % pts added on top, as long as the %pts read well in the news……5% CPI on top of the 9% will be twisted into a Fed victory.

    • gponym says:

      By “market dealers” do you mean “market makers”?

      What do you mean when you say “creating a huge imbalance (spreads being blown out) which will revert”?

      Thanks. I’d like to know what you’re saying but don’t follow the markets closely enough to fill in the blanks.

  36. Martino says:

    I am a little disappointed in your analysis for the first time….you assume that what these
    buffoon functionary gosplanners whose
    every action has produced failure can suddenly on a gaggle pivot,pull their
    steering levers and all will be repaired….
    The very existence of fiat money
    and neokeunesian aggregate demand
    Central Bank gosplanning is reaching its
    breakup point. They cannot stop it….
    Stein’s Law,”what cannot work,will stop”.

  37. Poor like you says:

    The Fed created a monster, and now the monster is rampaging out of control.

    • Einhal says:

      The market is back to “good news is good news and bad news is also good news.”

      I suspect this is all just algorithmic trading. No one knows what anything is worth anymore.

      • Jackson Y says:

        Good news: the economy is still very strong! Soft landing looks achievable! Market up

        Bad news: the economy is rapidly sinking into recession, which means lower rates soon! Market up

    • dishonest says:

      Help to create a monster and you might get punished by having to become Secretary of the Treasury.

      I’m lookin’ at you Janet.

      • historicus says:

        She is a puppet that spews banalities and platitudes, a collector of government pensions (at least 3 now) and gathers speaking fees that resemble payoffs.

    • Colinsky says:

      I keep thinking of the ending of FORBIDDEN PLANET.

  38. Mendocino Coast says:

    The Markets are fighting the Fed :
    Yes ! 100 % Correct >
    They the markets are acting just like the Fed when they where trying to raise raise Asset Prices Creating this massive Inflation. Seems they learned the hard way all in the Negative
    All these Markets : As Example
    Banks , Credit unions , Home Prices are all fighting the Fed trying to Hold the Money IN HOUSE rather then letting loose
    Saving Rates at competitive Institutions are not following the Rate increases in a “timely manner” but keeping their interest rates Low rather then raising them right along with the Fed but rather wait until
    others step in first with more competitive rates . Same with Homes Prices .
    Is a Lag and that hurts in the meantime . I think of it as simple Greed.
    When the Government does things they also create things of the same mindset as we sit by and ? WHAT ! this is a bad Movie as I see it .

    The overall Value of the Money is controlled by the Fed but are they
    working for themselves or for the masses of the people .
    Driven by Power the Agenda continues.
    to ignore the Fed is soothing but certainly not an answer .
    Is no Answer but rather a Condition

  39. JeffD says:

    Mortgage rates between July 27 and today — wild round trip. Was that some sort of end of the month window dressing, so some derivative product would’t implode?

  40. JeffD says:

    Content deleted by Wolf

    • Wolf Richter says:

      JeffD,

      Content deleted by me. I knew you would drag this manipulative taken-out-of context quote from ZH into here. Go listen to the whole interview, the whole thing, including the part that follows this quote, you will see. ZH is polluting your mind. Fine with me, but don’t drag this manipulative toxic BS into here.

      • JeffD says:

        The market’s explosion higher today certainly wasn’t a random event. And if it was by retail investors as other article point out, it certainly wasn’t because of Nancy Pelosi’s trip.

  41. Rosarito Dave says:

    So… after ALL the jawboning these last few days where the 10 year yield moved about 20 basis points higher, today it continued rising another 10 basis points, only to give it all back. It seems for now, bad news is good news AND good news (PMI’s) are good news…. Even stocks that reported yesterday and sold off big after hours (ABNB, AMD) have come back big…

    I agree that Jackson Hole would be a GREAT opportunity for a FED wake-up call, with another 50-75 point increase (especially if the CPI next week and the core come in hot).

    In the end, it’s money talks, bull**** walks. The Fed can talk all they want, but if the markets don’t listen and continue loosening, it’ll be ALL about the action taken.

  42. dishonest says:

    Looks like the market rallied on the clear and certain knowledge that the “Powell put” has got it;s back. I think when things get serious that Jerome will fold like a house of cards, as he did four years ago.

    • Jackson Y says:

      His money is literally on the line. Just look at his public financial disclosures to see how much he has at stake in the markets.

      He only just got rid of the muni bonds that just conveniently happened to be the same ones purchased by the Federal Reserve in 2020. He had to do this to comply with new ethics rules.

  43. Danno says:

    Fed needs credibility? Simple.

    A one time out of the blue 1% rate hike unannounced. Just like the old days.

    The market has to understand who is in charge ( or who pretends to be).

    Like Trump who I disposed but had to respect the fact that you never really knew what he would do next to keep some countries on their toes, the FED at this point should do the same.

    Then add their scheduled rate hikes and see what happens…. respect possibly finally earned.

  44. AK says:

    Does Federal Reserve Open Markets Committee include anyone who actually has any experience fighting high inflation ? Its one thing to declare the determination to fight inflation, its quite another thing to actually have battle experience in this fight.

    • Jackson Y says:

      Markets have really taken off on the peak inflation, peak tightening narrative.

      But maybe part of it is also a reaction to strong earnings, which so far has not seen declines that are typical of recessions. (S&P 500 earnings are about 7% above Q2 2021 levels.)

    • Jackson Y says:

      No, I don’t think so. But FOMC officials traditionally don’t serve for very long – instead, it’s just a stepping stone to a cushy multi-million dollar job “consulting” or delivering “motivational speeches” for Wall Street clients.

      That’s what they do: ca$h in. Yellen made over $7 million delivering speeches to Citi, Citadel & others. Bernanke became an advisor for PIMCO. All the inflation fighters from prior decades are long gone.

  45. Jackson Y says:

    Cleveland is forecasting +0.48% core CPI and +0.39% core PCE for July 2022. This would represent annualized rates of +5.91% and +4.78%, respectively – still far too high to definitively conclude that inflation has peaked.

    I don’t know how accurate they are historically, but they’ve been right on the mark for June PCE.

    For inflation to come down sustainably, the housing market has to crack, not just in sales volume but prices, eventually cascading down to rents & OER. Shelter is the largest component of CPI & PCE. That hasn’t happened yet, with national home prices still 18% higher year over year.

  46. Pauper says:

    Bernanke did nothing wrong

    • historicus says:

      “Bernanke did nothing wrong”
      He lied.
      He said QE was temporary and would end, rates normalize, when unemployment dipped below 6.5%. (had been 11%)
      Didnt stop did it?
      In the WSJ July 2009 laid out how all would roll of the balance sheet, and all would be just fine. That was TRILLIONS ago.

  47. HollywoodDog says:

    This whole game is predicated on credibility—the Fed’s in particular. But Powell’s lost his and credibility is something one can’t recover. He needs to be shown the door. Until then, this is all a charade.

  48. Michael Engel says:

    ISM service smashed est to the upside to fools the market…for a short
    term UT.

  49. Here it comes says:

    Do people here actually take some kind of financial positioning based upon the moves of the Fed, or is this mostly just educated (and non educated) ranting?

    For example, the Fed raises rates. Do you some of you go short TLT?

    I am NOT asking for financial advice (in fact the opposite). I would genuinely like to know if people here are actually positioning themselves solely based on the Fed’s actions.

    • Michael Engel says:

      Here it comes, traders don’t care, they nlook at something else. Fed moves, bad news, is an excuse to move markets. Expert who think that P/E move markets are obsessed with the Fed : blame the Fed always work.
      The Fed cannot fight inflation by raising rates without a glut.

    • Halibut says:

      “I would genuinely like to know if people here are actually positioning themselves solely based on the Fed’s actions.”

      Yes.

      • The Real Tony says:

        For me its like betting fixed horse races before they ever put in slot machines at the tracks where the only honest races where the big money stakes races. I try to use analogies from con games, scams and criminal activity to trade the U.S. stock market. I usually go with “how would the most amount of people lose the most amount of money” when I day trade or do short term trades knowing this is how the shysters and crooks setup the ongoing con game which is the U.S. stock market.

        • Halibut says:

          The horsemen have a pretty good idea who the contenders are. So, to make some extra change, they play the trifecta. All they have to do is get the trainers with “unlikely” disrupters to agree that “no effing way they’ll hit the board”. Most of these had little chance to show anyway. Makes for an easy trifecta box.

    • sunny129 says:

      Here it comes

      “if people here are actually positioning themselves solely based on the Fed’s actions.”

      Look at the chart of S&P since March of ’09. plot it against the timing of 4/5 QEs, long duration of ZRP, Twist, Stimuli. In all these times, investors front ran, before the rumor became news. Jump in S&P chart coincides with all those.

      No wonder S&P zoomed almost 400% to it’s peak. Same thing happened when Fed pivoted at 2.75% rate, reverse the QT and again in March of 2020 with shower of almost 5 Trillions with stimuli (twice).

      Fed has bent over backwards(ultra Dovish) to keep this bubble floating for the last 13 yrs. Now they say they are ‘serious’ about containing the inflation! There is a generation of young investors now believe that Fed will never mkt slide beyond 20%, irrespective of reality on the ground. DIP buying has become a habit.

      As I have repeatedly said, without Fed (really a Global bank), there is NO market any kind in the world. Fed has no credibility. Just words and rhetoric. The worst thing coming out of mouth, last month, of Mr. Powell is that Fed is close to ‘neutral’ rate! Mkts took off! The most wreck less Fed in Fed’s history.

    • Marbles says:

      Fortunately, or unfortunately, I have never based my investments on the Fed. I have tried to do what I think is right, and sane with my investing. I sleep better that way. I have not agreed with anything they’ve done since 2009. As far as what they say they are doing, or going to do about inflation, it remains to be seen if they have it in them to do it. It still won’t change my behavior, and I will still sleep fine.

      • The Real Tony says:

        The only market with any value where you can actually trade on fundamentals is the penny stock market and the over the counter market. That’s all that’s left of the stock market.

    • Will V says:

      Long puts on garbage. What else. Agree with wolf the FED will continue to raise rates slowly but it will soon “sink in” especially with QT. They won’t reverse but won’t race either. Haven’t seen an email from my electric utility that they are rescinded their rate hikes in the last six months. Lean Xmas coming with 2-3x utility bills increase this winter.

      Geez with my bitcoin down so much gotta cancel my Lucid Air….30 billion market cap burning cash …hahaha. It will end, there is gravity.

  50. billytrip says:

    I think the Fed is doing plenty wrong that widens the credibility gap. His tightening program is way to slow. His interest rates hikes are way too slow. In his pointless attempt to engineer a “soft landing” he’s not landing at all.

    We’ll see what he does in the month to come. He is going to have to harden up if he wants to beat a foe as formidable as inflation.

    • billytrip says:

      *** edits of the embarrassing typos ***
      I think the Fed is doing plenty wrong that is causing the credibility gap. His tightening program is way too slow. His interest rates hikes are way too slow. In his pointless attempt to engineer a “soft landing” he’s not landing at all.

      We’ll see what he does in the months to come. He is going to have to harden up if he wants to beat a foe as formidable as inflation.

  51. George says:

    The Fed rate remains near a historic low except for the past ten years of artificially low interest rates to appease government and its appetite for deficit spending and to keep government interest expense low. Instead of raising interest rates years ago to reel in poor fiscal policies and risky private sector investments, the Fed has been accommodating for years, resulting in asset bubble after asset bubble. A more normal Fed rate had been historically between 3-5 percent when inflation was under control, and much higher to combat inflation. With the Fed rate at 2.5 percent, it is not surprising the market isn’t taking the Fed seriously. From 1970-2000 the Fed rate was almost always above 4% and went as high as approx. 20 percent. Of course, government debt was not nearly as high as it is today. It is unlikely we will see rates anywhere near that high. The Fed won’t be serious about tackling inflation until rates go above 4 percent, and one has to wonder if the Fed has the independence and courage to make such moves. Volcker did what he had to do though it was painful in the short term.

    • sunny129 says:

      George

      Mr. Volcker raised the rate, repeatedly, from late 1979 til mid 1981, to almost 20% to reign the inflation at 15%. It took nearly 18 months. I was here, investing 10y bond giving 14%. B/c of his bold action we had deflation or more dis-inflation for 41 yrs. Of course Globalization and the advances in Tech did help.

      Mr. Powell has neither the guts or the integrity of Mr. Volcker. Same with all the other FOMC members. None of them has held a job in private sector. They remain disconnected with Main St but close to Wall St

      See the last interview of Mr. Volcker in 2019 before this death, online.

  52. drowningfish says:

    based on what daly said, seems like the market is pricing in a 50 bps hike for september, which is now considered bullish.

    given that there is no rate hike until september, this market could indeed become a bull market. if inflation comes down by september perhaps by then the fed will indeed just go with a 50 bps hike and everyone is happy. i think that outcome can be considered as a “win” against the fed.

    • Wolf Richter says:

      Daly doesn’t get to vote this year. It doesn’t matter what she thinks is “reasonable.”

      • drowningfish says:

        i know but that it doesnt matter what i believe, the market decides that she has more credibility than the fed itself. we are all susceptible to believing what we want to believe.

        i think the market does have a plan. it isnt fighting to the fed, it is just trying to last everything else. if housing and commodities come down, and inflation and employment also down, then fed will have no more reason to tighten and will begin to ease even. so the goal here is to outlast everyone else. again this is not what i think, its what i think the market thinks.

        • Gomp says:

          We have to conquer inflation if we are to save the economy. Period.

        • The Real Tony says:

          The dollar will tank and commodity prices will shoot back up, I guarantee it.

  53. Ernest says:

    I wasnt trading during the dotcom bubble but would you say this is reminiscent of it with regards to the market fighting the fed? From what i’ve read about it Greenspan was raising rates somewhat aggressively but the markets kept blowing it off until it all burst. Or am I way off here?

    • suny129 says:

      Ernest

      Dot com bubble was entirely limited to Tech industry and mostly in USA, unlike now. It is 3rd largest ‘everything’ bubble, global wise with record debts-levels incomparable to 2000 or the 2008. It was leaking air, but Fed replenished the ‘punch’ bowel and the PARTY is back on!

      It is all about Fed and nothing but the Fed. Mkts and the economy (productive kind) remain disconnected.

  54. Michael Engel says:

    Taiwan is 92% of chips under 10 nanometer. Korea is 9%. China blocked
    2,000 products from Taiwan.
    If high end chips are in the list NDX & SPX are toasted.

  55. SnotFroth says:

    Looks like the mortgage market is throwing in the towel, at least for now. 30 year fixed almost got down into the 4s again but is up like 0.45% in the last three days.

    The dip was enough for real estate agents to reach out to me saying
    rates have softened so now it’s time to buy.

    I want the opposite. I want round two. Heck I hope when the Fed shifts gears on QT in September the rate goes over 6% and really gives house prices a kick in the face.

    • jon says:

      People get lost in the trees and miss out the forest. The day today up down in the market is making people delusional. Just look at the bigger picture.

      Inflation is at 9 percent plus. It should be around 2 percent per Fed. Inflation might have peaked or might not have.

      What do you think Fed is going to do to kill demand and tame inflation ?

      Bear rallies can be a very vicious ones. People get suck into it to be again assaulted by bears.

    • Shandy says:

      Raid your rent sir cause it ain’t gonna happen

  56. joe2 says:

    So it’s definitely stagflation then.
    At least I may be able to get some 15% bonds like my father did back in the 1970s. But will they help with a 25% inflation rate?

    Woo Hoo! Don’t cry for us Argentina. We love your style.

  57. RickV says:

    Bravo

  58. Shandy says:

    This has, could been and is “ugly for years”.
    I’m going to sit up straight and read our thread. Thank you all participating members.
    Not going to have much sleep tonight.
    Has any one else brought out the lucky liquor…. for a bit?

  59. JeffD says:

    From the comments here, my summary would be that no one here (except you Wolf) believes the Fed is acting in proportion to the urgency of this problem, even after the Fed having bothched the response for the entire past year. In other words, complete lack of Fed credibility.

    • Wolf Richter says:

      Yes, that’s a huge problem, as I pointed out in the article. This will get very painful. The Fed is going keep going until it has its credibility back and gets this under control, as I said in the article.

      All these comments just confirm the article.

    • ace says:

      credibility will be decided years from now. it’s a work-in-progress. but will be viewed as negative, given their hand in the buildup, crescendo, decrescendo. Fed knows this & they know they need save save face for they would hate to be drug across the history books as complete morons, and not just half morons. frankly, volcker has made their jobs much easier from this point on. big beast though… this animal is going to bleed slow and hang in the locker for several years.

  60. Patrick G Serowka says:

    If they want the market to transmit their policy why don’t they make massive unexpected dumping of treasuries and mbs, wouldn’t that shock the markets into transmission faster than small rate increases?

    • Naked lady says:

      Done did that already 5 crisis ago.
      What the world needs is a financial cleansing that releases the honest apart habitual criminal scum bag.

  61. We rely on very poor economic control mechanisms that require us to kill the entire economy to keep it healthy.

    We should reengineer our economic tools and mechanisms to avoid reliance upon inherently unreliable transmission methods.

    A proper economic control mechanism does not require transmission.

    Our existing economic control mechanisms are not innately superior. The exist as much by historical accident as reason.

    We can do better.

    • AK says:

      How ?

    • Lynn says:

      Keeping necessities like housing, medical and food off the global investment market would help. Necessities should only be internally financed to lessen speculation. Shelter should not be an income for pensions or very large corporations.

      That would require congress to act, but congress people are directly invested in the global speculation processes, so it probably won’t happen.

      • Lynn says:

        Meant to add that if necessities are stable then it should hurt far less people directly when the FED needs to compensate for over exuberance or irresponsibility- however one wants to phrase it.

    • historicus says:

      Avraam
      How about a FREE market system?

  62. Eastwind says:

    My focus, as always, is how to invest given the macro situation. If Powell is credible, and the markets are in denial, then I know what to do, and in fact have already done it: I’m 75% in cash waiting for the crash when wall street wakes up and has its Oh $hit moment.

    But I think there is a significant chance Powell isn’t credible. He’s not really been tested yet, as others pointed out. If we do start to see deep recessionary behavior out of the economy, will Powell declare premature victory? A deep recession will bring down inflation, but not immediately. There will be a pain period before inflation starts down where Powell needs to stick to his program in spite of bad economic data. Inflation expectations, in particular, take a long time to turn around. It is going to be very tempting to him to seize on the first tick downward in the CPI or PCE and start pivoting too early.

    So my deep question is how to invest ‘just in case’ we get easing too early on an inflation down-tick and then inflation stops going down (at say 7%) or reverses back up again?

    If I had a crystal ball that said 100% chance of that scenario, how should I invest now? (I think the chances are maybe 75%, but I can hedge that once I figure out how to handle the 100% chance)

    • JeffD says:

      If they pause after a CPI tick down of just 0.5%, no one will ever beieve this Fed again. Period. Inflation will rocket higher with no chance of control.

      • Eastwind says:

        They don’t need to pivot to lose all credibility, no one believes them as it is. Hence S&P at 4150 instead of 3150. That’s the whole point of Wolf’s article.

        I don’t believe them, but I have to allow for a chance that they end up surprising themselves and doing the right thing in spite of expectations.

  63. Finster says:

    Wolf, you hit the nail on the head. The Fed may need to go shock and awe if markets don’t capitulate soon. Unlikely the Fed would do it, but a surprise inter-meeting hike is easily supportable.

    We spectators may just need to be patient. A 2008-like fourth quarter may be in store. The notion that the risk is all on the side of being too tight too early was never rational and the consequences may soon become obvious.

  64. Arya Stark says:

    OOOOOH WEEEEE, Coinbase up 40% this morning!

    Chipotle says inflation ain’t hurting them. Sure the lower class customer can’t pay but there are plenty in the laptop class that are happy to pay for a $15 burrito.

    Wayfair doing fine for high end.

    Still waiting for the Fed to punch back? I’m sure they’ll get right on it.

    • Wolf Richter says:

      Arya Stark,

      I hate this manipulative hype-troll BS about Warfair “doing fine for high end”

      Wayfair reported today that revenues plunged 15%, to $3.28 billion in Q2 , and that it generated a net loss of $378 million.

      For the six-month period, its revenues also plunged by 15%, and the net loss was $697 million.

      At this rate, the company will go out of business.

      There is nothing at this company that is doing “fine” except the hype YOU are spreading manure-like around here.

      Shares are down 82% from the high.

      Short sellers of the stock are fine, though.

      Glad you used this as an example to illustrate your point. With this example, you not only shot yourself in the foot, but you blew both of your feet off.

      • jon says:

        People usually miss the forest for trees. They just see that stocks went up few percentage up but won’t register that in last 1 year or so it has lost 80% plus

  65. Egon says:

    On 16th of may this year Black Rock told on Reuters : ” A sell-off in U.S. stocks and bonds will likely dry up during the summer months as the Federal Reserve whittles down its nearly $9 trillion balance sheet, said Rick Rieder, chief investment officer of global fixed income at Blackrock, the world’s largest asset manager.

    Rieder believes the Fed’s balance sheet reduction, which is expected to begin in June, will prove a “catalyzing moment” for asset prices and after that confidence may return to markets.”

    Wolf, what you say to that ?

    • Wolf Richter says:

      I too said that there would be a summer rally. And we got one. I said it would be a summer rally like the huge summer rally in 2000, which occurred during the dotcom bust that started in March 2000. The Nasdaq, which had been plunging until mid-May 2000, rallied 33% into mid-July, but didn’t get back to its previous high. And then, after two months of glorious summer rally, it was all over and the Nasdaq went on to collapse by 78% over the next two years.

      • Egon says:

        I think like you. But that is not that what Black Rocks said. Rieder not said it should be temporary only. He said that the balance sheet reduction will prove as a catalyzing event for higher asset prices. That is what I not get. How balance sheet reduction can cause higher asset prices.
        The opposite should happen, after prices get pushed up in order to create new exit points, right ?

        • Wolf Richter says:

          Yeah, he is lying to hype his book.

          Last time (2018), the little bitty QT we had going on started tearing up the markets about 9 months into it. Everyone old enough to have looked at it in 2018 knows that.

          A market that is addicted to QE suffocates under QT. He knows that too, and he is just making a last-ditch effort to hype his book.

  66. Nate says:

    Personally, I kind of hate how much the market moves over perception of Fed actions but that’s probably one of the reasons I went passive 20 years ago and never looked back, rather than trying to time the ups and down.

    As I see it, the reality is that short and medium-term, Fed will keep on raising rates until inflation comes down. Crazy, right? Some of the most recent statements suggest that they won’t immediately pause even if they have mixed signals, like inflation ticking down. So, the market is probably being a bit optimistic. That said, we are going into an election cycle and Powell is one of the weaker of the chairmen I can remember. So if inflation somehow turns a dramatic corner, then Fed will likely take a breather, especially if that’s coupled with some job losses or recession indicators. But I think it’s far more likely that inflation will be mixed or remain elevated. Tight job market and folks always are more aggressive with hikes rather than drops/pauses, unless it’s apocalyptical.

    What will actually happen? I don’t know; maybe you do, maybe not. The inflation picture is really friggin’ complicated, with a post-pandemic economy shifting from goods and services, a lot of the inflation initially being imported from global events like China and Russia, not nearly enough wage inflation considering the tight job market, etc. etc. That all of the Western economies seem to be coordinating their tightening seems to ensure that we’re going through a recession of some kind. That inflation is elevated almost everywhere suggests it’s due to either causes outside of monetary control or due to the prior coordination of monetary policy. The economy got weird during the pandemic and continues to be weird post-pandemic, which makes accurate predictions harder.

    All I do know is that I never expected after the Fed announced a 75 basis point hike, the S&P 500 would go up by around 7%. Maybe you did, but my honest assessment of my own skills suggests my choice of passive investing over timing continues to be optimal. I’ll just take my 5-6% globally diversified average real annual return over a decade, ride out the volatility, and say thank you very much Mr. Market for my porridge.

  67. Konstantin says:

    Inflation is the saving grace of our current financial system given the enormous amount of debt held by both the public and private sectors. If the Fed keeps rates high for long, it will be a complete economic devastation with junk bonds going under, the housing market collapsing and banks finding themselves with tons of bad debt. We need inflation to clear the enormous amount of debt and start over another grand cycle of debt accumulation. Fed needs to put brakes on the whole process so we don’t reach destructive levels of inflation and completely destroy the credibility of the dollar. Turkey gives important example how developed economies can deal with inflation. They grew 7.3% in Q1 despite having inflation nearly 80% y/y.

    • Wolf Richter says:

      Such brutal BS. We need bankruptcies to clear the debts of businesses, households, and municipal governments at the expense of investors and lenders that got compensated to take those risks by collecting interest for all these years. Why do regular people have to pay via inflation to bail out investors?

      Your proposal is thoughtless brutality waged on regular people.

      You’re promoting a billionaire’s wet dream.

      • Konstantin says:

        I am only responding to your analysis that the market is “fighting the Fed”. Well, maybe the market realizes that we need at least some inflation to deal with the current massive amounts of debt accumulated during the pandemic and the previous credit cycle. This will likely force the Fed not to be too diligent in fighting inflation despite their current rhetoric.

        The average American has $90,400 in debt across all types of consumer debt products. If interest rates are raised sharply it will be a massive pain on ordinary people and many of them will not be able to stay solvent. Not to mention, many people will lose their job. Inflation, if it is driven by rising wages and not ballooning costs, can help people (and governments) pay debt. Ultimately, the holders of debt are the ones punished by high inflation, not borrowers. If you lose your home because you can’t pay back your mortgage, I don’t think that you lost less than the bank who gave you the loan.

        That said, I also fully support what you are saying about clearing bad debts and fixing capital misallocation which is a process that needs to be done sooner or later. But I don’t think that we can expect the Fed to start willingly a massive deleveraging process like the one we had in 2007-2009. More likely, central banks will continue to kick the can down the road until it explodes in their face, which is a problem with all central planning.

  68. Tanya says:

    We are not going back to 2% inflation. We are going to stay at least 4% to 5% inflation on average until 2030 the earliest. This is being conservative with 4% to 5% inflation. The US Federal Reserve and other world central banks like Canada, Australia, Bank of England, Bank of New Zealand, ECB etc. must raise rates much higher. I am thinking another 3% minimum on top of what we got now.

Comments are closed.