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The Fed Is Winging It: A 75 Basis-Point Hike “Seemed Like the Right Thing”

The Fed Is Winging It: A 75 Basis-Point Hike “Seemed Like the Right Thing”

powell

The Federal Reserve’s Federal Open Market Committee (FOMC) today announced an increase of 75 basis points to the target federal funds rate, raising the rate to 1.75% from 1%. June’s meeting today was the third meeting this year at which the FOMC has raised rates. Coming into the March meeting this year, however, the FOMC had not raised the target rate since March of 2020, even though price inflation began to accelerate during the second half of 2021.

fomc

Today’s 75-basis-point increase is the largest increase since late 1994 when the FOMC raised the target rate from 4.75% to 5.5%.

Notably, however, this increase comes mere weeks after the Fed Chair Powell slapped down the idea of a 75-basis point increase in June. As reported by Reuters on May 4, Powell had insisted “A 75 basis point increase is not something that the committee is actively considering.”

That didn’t last long.

The fact that the Fed was forced to hike the target rate by higher than it had suggested was even possible earlier in the year is a reminder that the Fed and its economists are simply in a reactionary mode when it comes to the US economy’s problem with mounting price inflation.

fomc

As even Powell admitted during today’s press conference, the Fed was surprised by how high price inflation has grown. The Fed then had to pivot in order to answer calls that the central bank “do something” about price inflation.

But when it comes to the Fed’s decisions about setting target rates, it is I increasingly obvious there is no model. The “plan,” to the extent one exists at all, amounts to “let’s see how bad inflation is, and then we’ll pick a target rate and hope that solves the problem.”

…click on the above link to read the rest of the article…

The Big Questions We Should All Be Asking Geopolitically

The Big Questions We Should All Be Asking Geopolitically

To say that current events are ‘messy’ today would be the height of understatement. Everyday the headlines blare at us some new set of contradictory data points convincing us of some lie that serves someone’s purpose.

No matter how hard we try to keep up with things, cutting out the extraneous to find the nuggets of signal from the jungle of noise is more than a full-time job.

Sometimes, however, it’s best to take a few steps back, fall back on first principles and remind ourselves who the players are, what they want and then ask the big question of each of them… are they succeeding?

But to even ask that question we have to ask ourselves honestly the following question:

“What will they be willing to do to survive under present circumstances?”

This is the most uncomfortable question you can ever ask anyone. What would you do to survive? To protect your family? Your position? Your conception of yourself?

Everyone’s morality has limits. Everyone. Everyone has a shadow, a dark side, a place where they retreat to their Hobbesian self and see the world purely in terms of ‘a war of all against all.’ Anyone who refuses to admit this to themselves is someone you should run screaming from.

Those that always claim the moral high ground, who are always “the goodies!” are those without limits on their behavior. As the great H.L. Mencken proclaimed nearly 70 years ago:

The urge to save humanity is almost always only a false-face for the urge to rule it. Power is what all messiahs really seek: not the chance to serve. This is true even of the pious brethren who carry the gospel to foreign parts.

…click on the above link to read the rest of the article…

FRA-OIS Explodes: Here Is The Only Chart Powell Is Closely Watching, And Why It Is Soaring

FRA-OIS Explodes: Here Is The Only Chart Powell Is Closely Watching, And Why It Is Soaring

Some were quick to mock repo guru and former NY Fed staffer Zoltan Pozsar when he warned that the unexpected western blockade of Russia had the feel of a Lehman weekend, because virtually nobody had any idea what the forced exclusion of  a G-20 economy from the global financial system would lead to. In fact, just yesterday Jerome Powell admitted that he had not been consulted, suggesting that arguably the most momentous financial decision in modern history has made without consulting the single most important financial person in the world.

However, it appears that while Pozsar may have been ahead of the curve, as usual, he was not wrong, and today the all important FRA-OIS indicator of interbank funding stress (and money-market risk) is surging, and at last check was above 37bps, up a whopping 12 pts…

… amid relentless selling in March 2022 eurodollar futures with the contract off session lows but remains cheaper by around 10bp on the day, with some speculating that at least some funding markets are starting to grind to a halt.

One can argue that while Powell and the Fed may be oblivious to the ongoing collapse in stocks, which they view as overvalued and as having enough buffer to drop especiallyhe is closely watching every uptick in this most critical stress indicator.

A very quick primer on this all important spread:

  • What is FRA? A forward rate agreement is a deal to swap future fixed interest payments for variable ones, or vice versa. The key rate for U.S. markets is the three-month London interbank offered rate, or Libor, in U.S. dollars…

…click on the above link to read the rest of the article…

Fed Chair Faces the Ultimate Lose-Lose Decision

Fed Chair Faces the Ultimate Lose-Lose Decision

Photo by Vadim Sadovski

The U.S. economy teeters between two catastrophes: wild and untamed hyperinflation that turns cash into wallpaper, or an epic crash that would make 2008 look like a day at the beach. Federal Reserve Chairman Jerome Powell has led the U.S. government’s monetary policy to this point.

Now he’s attempting a nearly impossible feat…

He will need to thread the needle between the two economic disasters, between the frying pan and the fire, to return the U.S. economy to any form of sustainable prosperity.

Is that kind of miracle even possible?

The frying pan: 40-year-record-high inflation

We will start with the obvious issue: December’s inflation report of 7% year-over-year price increases. That’s at the end an entire year where inflation rose steadily for eleven of twelve months. August, the exception, saw a 0.1% decline.


Source

In addition, what Powell endlessly assured us was merely “transitory” inflation, a “blip,” caused by “supply chain snarls” and so on? It’s the highest we’ve seen in 40 years.

Most of our readers who have a little gray in their hair may remember how grim the stagflationary crisis of the late 70s and early 80s was. However, the average American is only 38 years old. They most likely have no idea what we’re facing, even while watching their personal expenses go up month after month.

And make no mistake, those expenses have gone up quite a bit for virtually everyone.

The Bureau of Labor and Statistics (BLS) report revealed the prices that rose the most in December 2021 :

  • Gasoline +49.6%
  • Fuel oil, and other fuels for heating +48.9% (just in time for the coldest days of winter, too)
  • Natural gas: +24.1%
  • Meats, poultry, fish, and eggs: +12.5%
  • Electricity: +6.3%
  • Housing +4.1%

If you find this list depressing, I’m afraid your solace isn’t immune to this trend… Distilled spirits (excluding whiskey) rose 3.4% in price.

…click on the above link to read the rest of the article…

Is Powell Again Pulling Strings From “The Shadows”?

Is Powell Again Pulling Strings From “The Shadows”?

Recently, we have seen stocks rally while the dollar falls. Some of us are wondering why the dollar is falling at the same time currency traders are busy penciling in as many as four interest rate increases. The ICE U.S. Dollar Index, a measure of the currency against a basket of six major rivals, was down 0.1% on Thursday hitting a two-month low. This drop leaves the dollar with a loss of 1.2% since the start of the new year.A more aggressive tightening of monetary policy and “hawkish” central bank intent on slowing inflation is generally seen as supportive to a currency. Is it possible Powell dropped the dollar to kick the stock market back up? I contend this is what is happening. Such a move has been used in the past. In volatile markets, like we have today ruled at times by emotions, the fear of missing out, and a slew of traders trained to buy the dip, it doesn’t take much to turn an ugly selling streak into a buying panic.

The combination of a sudden drop in the dollar just as the Fed starts talking about tapering and raising rates is difficult to understand. With most seasoned investors allergic to risk, logic would tend to make them view the coming Fed action as a strong headwind to markets going higher. At the same time, higher interest rates and less expansion of the Fed’s balance sheet generally moves the dollar higher.

While it could be argued the falling dollar simply reflects the coming recession into which the Fed is tightening, again I point to Powell as the great enabler…

…click on the above link to read the rest of the article…

2021 Year in Review: Crisis of Authority and the Age of Narratives

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year is no exception. Poignant and delightfully acerbic when necessary, considering the troubling times. As with past years, he selected Peak Prosperity as the site where it is published in full. It is longer than our usual posts, but worth the time to read in full. This is Part 1.

Introduction

Dave: You do lack self control, but I learned and laughed making my way thru this.

~ Larry Summers (@LHSummers), former Secretary of the Treasury

I’ve been trying to reach you about your car’s extended warranty. What began more than a dozen years ago as a synopsis of the year’s events in markets and finance for a few friends morphed beyond my control into a Year in Review (YIR)—an attempt to chronicle human folly and world events for the entire year. It captures key moments before they slip into the brain fog. The process of trying to write a coherent narrative helps me better understand WTF just happened and seminal moments that catch my eye.

By far my favorite end-of-year recap for the last ten years. Finished it yesterday. Once again David hasn’t disappointed. He’s on my I want to go to dinner with list.

~ Jim Pallotta (@jimpallotta13), money manager and former owner of Boston Celtics

I’m game, Jim, even if it’s just a pretzel, nachos, and a brewski. The title, “Crisis of Authority,” is a double entendre. On the one hand, previously trusted authorities that we relied on to better understand the world are long gone. Edward R. Murrow, Walter Cronkite, and Tim Russert have been replaced with Chris Cuomo, Don Lemon, and Brian Stelter. Oops. Scratch Chris Cuomo..

…click on the above link to read the rest of the article…

Chairman Powell Paralyzed With Fear As Inflation Takes Over

Chairman Powell Paralyzed With Fear As Inflation Takes Over

Public domain, courtesy of the Federal Reserve

One thing is certain, inflation is no longer officially “transitory.”

For months, recently reappointed Federal Reserve Chairman Jerome Powell kept telling the public that rising inflation was transitory, and would soon subside.

It hasn’t, and isn’t likely to in the near future either. So the next natural question to think about is: What now, Chairman Powell?

With four major pivots in monetary policy over a short three years, according to CNBC, both Powell and the Fed he leads seem confused about what to do next:

At its two-day meeting next week, the Fed is expected to say it will double the pace of its bond purchase taper, while also likely hinting at more aggressive interest rate hikes coming in 2022. The moves are coming in response to inflation that is stronger and longer-lasting than Fed officials had anticipated.

But [Joseph] LaVorgna worries that the Fed, after months of calling inflation “transitory,” is now making the mistake of overestimating its duration and tightening at the wrong time. That could necessitate officials again having to change back next year, if the current inflation trend runs out of steam. [emphasis added]

Powell’s remarks revealed his confusion about the economy, and why he chose the word “transitory” in the first place:

 “We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation,” he told the Senate Committee. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”

…click on the above link to read the rest of the article…

 

The Biggest Federal Reserve Scandal

The Biggest Federal Reserve Scandal

Following revelations that Federal Reserve officials made trades in financial assets while the Fed was taking extraordinary efforts to “stimulate” the economy, Federal Reserve Chairman Jerome Powell ordered a review of the Fed’s ethics rules. While these trades appear problematic, they pale in comparison to the biggest Fed scandal — the Fed’s impoverishment of ordinary Americans, enrichment of the elites, and facilitation of government debt and deficits.

The depression induced by coronavirus, though really caused by so-called public health actions government took in response, was the official reason for the Fed’s increased asset purchases last year. However, the Fed actually started ramping up its money creating activities in September of 2019, when it began pouring billions a day into the repo markets, which banks use to make short-term loans to each other, in order to keep repo market interest rates low.

Coronavirus was just a convenient excuse for the Fed to do more of what it was already doing. Now, the Fed is using the limited reopening as a scapegoat for rising prices. Of course, anyone who understands Austrian economics understands that rising prices are a symptom, not a cause, of inflation. Inflation is the very act of money creation by the Fed.

Rising prices that diminish the average American’s standard of living are not the only result of the Fed’s manipulation of the money supply. The manipulation distorts economic signals, producing results including booms, bubbles, and busts.

Inflation has always benefited the well-connected elites who receive the Fed’s newly created money before the new money causes widespread price increases. The true motivation behind Fed policies was revealed by former Fed official Andrew Huszar in 2013. Huszar, writing for the Wall Street Journal, confirmed that quantitative easing kept stock prices high, instead of helping Americans struggling with the aftereffects of the 2008 meltdown.

…click on the above link to read the rest of the article…

Transitory Inflation Takes Hold of the Economy – How Long Will It Last?

Just a couple of weeks ago, Bloomberg reported that Federal Reserve Chairman Jerome Powell sold investors on the idea that rising inflation wasn’t going to last. Officially, as of May 2021, inflation had risen 5%, the highest since August 2008.

Here’s how we know investors bought it: while the CPI is running at 5%, the yield on the 10-year Treasury languishes around 1.5%. For comparison, back in 2008, the 10-year Treasury yield stayed above 3.5% from January through November (and even broke 4% on a few occasions).

Bond buyers do not want interest rates to rise. A 10-year bond yielding 1.5% looks pretty pitiful if interest rates rise to, say, 3.5% (like back in 2008). So clearly bond investors aren’t expecting interest rates to rise in response to this little blip of inflation.

Maybe you remember the specific term Powell used to describe a temporary period of excessive inflation?

“Transitory.”

Whew, that’s a relief! At least we won’t have to tolerate this way-over-target inflation situation forever.

Today’s inflation: how high is too high?

We know that real-world inflation is somewhere between 9-12%, depending on which Federal Reserve methodology is used to calculate it. Either way, it’s quite high.

That’s right, we can get a closer look at the realities of inflation using methods developed and employed by the Federal Reserve itself.

In the 1980s, the Fed was aware that Americans spent money to maintain their standard of living (in other words, your level of income, comforts and services like healthcare you purchase). Official inflation calculations took this into account.

Using the 1980s formula, you can see how today’s Fed “official inflation” stacks up on the chart below:

If you thought 5% inflation was bad, 13% is much worse.

…click on the above link to read the rest of the article…

How to Buffer the Fallout from America’s Third World Death Spiral

How to Buffer the Fallout from America’s Third World Death Spiral

“What the hell?!” – President Joe Biden, June 16, 2021

Out of Control

American workers are trying to make their way in an economy that’s rigged against them.  We made this claim many years ago.  Today, for fun and for free, we revisit this assertion…starting with the latest from those doing the rigging.

This week, after a two day meeting, the Federal Open Market Committee (FOMC) released their statement.  Nothing material changed.  The Fed will continue to hold the federal funds rate near zero.  The Fed will also continue to create at least $120 billion per month from thin air to buy Treasuries and mortgage-backed securities.

Bond yields spiked and the price of gold dropped because 13 Fed officials now plot dots that project two hikes to the federal funds rate in 2023.  Fed Chair Jay Powell also mentioned the Fed is “talking about talking about” bond tapering.  These technocrats likely know – though they won’t admit – they’ve already lost control.

Consumer price inflation is ‘officially’ rising at a 5 percent annualized rate.  However, the ‘unofficial’ rate of consumer price inflation, as calculated using methodologies in place in 1980, is about 13 percent.  This rate of inflation is remarkably destructive to household budgets.

‘Talking about talking about’ tapering and telegraphing federal funds rate increases some two years from now will do little to contain consumer price inflation.  The fact is, it has already veered out of control.  We expect gas prices to top $5 per gallon in California this summer.  Many Americans are not prepared for sustained, unrelenting price inflation.

Here’s the hard, back of the napkin math they are facing…

Sour Grapes

…click on the above link to read the rest of the article…

Two Pins Threatening Multiple Asset Bubbles

Two Pins Threatening Multiple Asset Bubbles

“Powell Says Fed Policies “Absolutely” Don’t Add To Inequality” -Bloomberg May 2020

The headline above is but one of countless times Fed Chairman Powell and his colleagues confidently said their policies do not result in wealth or income inequality. Their political stature and use of complex economic lingo give weight to their opinions in the media. Nevertheless, a deep examination of the Fed’s practices and their consequences leaves us to think otherwise.

In our opinion, the Fed’s contribution to wealth inequality is significant and grossly misunderstood. We have written articles explaining why QE and low interest rates generally benefit the wealthy and harm the poor. This article backs up those prior arguments with quantitative muscle.

Timely for investors, we also draw some lines between wealth inequality and financial stability and their relationship to monetary policy. We think it is becoming increasingly possible wealth inequality, and in particular, the outsized effect inflation has on the poor, could be the needle to pop many asset bubbles. The other possible needle is the Fed’s wanting for financial stability.

**Due to the importance of monetary policy from economic, societal, and market perspectives we are breaking this article into two. We will share part two next week.

Background

More inflation and financial stability (rising asset prices) are two of the three core tenets backing monetary policy. A strong labor market is the third objective. We focus on inflation in this article and financial stability in part II.

In our article Two Percent for the One Percent, we explain why inflation is detrimental to the poor, while rising asset prices (financial stability) primarily benefit the wealthy. The following paragraphs from the article explain:

…click on the above link to read the rest of the article…

Surging Inflation Might Be the Rumblings of an Economic Tsunami

Inflation in the U.S. is on the rise, may have started heating up last year, and is now on the cusp of spiraling out of control.Gasoline prices pushing $5 per gallon are concerning bad, and will strain family budgets across the country following on the heels of the COVID-19 pandemic.

The 400% increase in lumber prices isn’t helping either, and as Business Insider reports: “Certain food items, household products, appliances, cars, and homes are all seeing prices surge” thanks to supply chain issues.

So the economic situation is already pretty dicey.

But what if the situation is much worse?

What if the Fed has played such a good “shell game” with inflation that something bigger is actually brewing?

Former Treasury Secretary Larry Summers is worried because of how fast inflation is heating up:

“I was on the worried side about inflation and it’s all moved much faster, much sooner than I had predicted,” Summers said in an interview with David Westin on Bloomberg Television’s “Wall Street Week.” “That has to make us nervous going forward.” [emphasis added]

And this fast-rising inflation still seems to be flying under the Fed’s radar. Robert Wenzel didn’t mince any words, calling Chairman Jerome Powell’s Federal Reserve “clueless.”

Based on Powell’s previous track record, Wenzel’s comment might be reasonable. That Powell seemed to be “ignoring” parts of the entire story behind inflation last year further supports Wenzel’s argument, and adds uncertainty.

Inflation surging and the Fed failing to even acknowledge it, let alone live up to their inflation-control mandate? This is a recipe for a frightening situation. Bloomberg spotlighted one fact that raises at least one serious question:

…click on the above link to read the rest of the article…

Why Is Billionaire Investor & Former Gold Skeptic Sam Zell Buying Gold?

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Another billionaire turns to gold, Arkansas no longer to tax sales of gold and silver, and Minnesota as a possible source of abundant gold ore.

Billionaire investor and gold skeptic Sam Zell buys gold ‑ here’s why

There has been no shortage of stories of big-name investors touting or turning to gold over the past few years, and especially over the course of last year as the Federal Reserve sparked widespread inflation concerns with its multi-trillion-dollar stimulus. Sam Zell, chairman of Equity Group Investments and a billionaire investor whose portfolio spans across a wide range of industries, recently shared that he, too, has embraced gold primarily over inflation fears.

Speaking to Bloomberg, Zell noted that he previously counted himself among investors who viewed gold as a suboptimal investment compared to higher-yielding assets. But now?

Obviously one of the natural reactions is to buy gold. It feels very funny because I’ve spent my career talking about why would you want to own gold? It has no income, it costs to store. And yet, when you see the debasement of the currency, you say, what am I going to hold on to?

Zell now finds gold to be a safer option to hold over unbacked currencies, with governments around the world experimenting with aggressively-loose monetary policies.

Indeed, Zell said that the Fed is far from the only central bank causing commotion in the global economy, and that all sovereign fiat currencies should be met with a watchful eye…

…click on the above link to read the rest of the article…

Peter Schiff: The Box That the Federal Reserve Is In

Peter Schiff: The Box That the Federal Reserve Is In

Jerome Powell and Janet Yellen testified jointly before the US Senate last week. Inflation was a big topic of conversation. The Fed chair continued to insist that the central can fight inflation if necessary, but that it really isn’t a problem we need to worry about right now. In his podcast, Peter Schiff said the truth is inflation is a problem. And when it comes to dealing with that problem, the Fed is in a box. It will never pick a fight that it can’t win.

The Federal Reserve balance sheet has swelled to a new record of over $7.72 trillion. It was up another $26.1 billion on the week last week. Peter said he expects this number to continue increasing at an even faster rate in the near future.

I would not be surprised to see the balance sheet hit $10 trillion by the end of 2021 because we have a lot of deficit spending in the pipeline and there is no way to pay for it other than the Federal Reserve.”

One of the questions directed toward Powell was about the Federal Reserve’s independence. Powell talked about how important it is. But Peter said the actions of the Fed chair show there’s really no independence at all.

There’s independence in form only, but not in substance. We pretend we have an independent Fed, but in reality, the Fed acts as if it’s just a branch of the US Treasury Department. The fact that both the secretary of the Treasury and the Fed chairman are testifying together shows a degree of cooperation. They’re working together and it seems that they are trying to coordinate their policies.”

The reason the Fed is keeping interest rates so low and expanding its balance sheet is to accommodate the US government as it spends more and more money.

…click on the above link to read the rest of the article…

peter schiff, schiff gold, jerome powell, janet yellen, fed, us federal reserve, us treasury department, us senate, inflation, balance sheet

There’s a Serious Flaw to the Team Powell-Yellen Inflation Scheme

There’s a Serious Flaw to the Team Powell-Yellen Inflation Scheme

If you’re a wage earner, retiree, or a lowly saver, your wealth is in imminent danger.

A lifetime of schlepping and saving could be rapidly vaporized over the next several years.  In fact, the forces towards this end have already been set in motion.

Indeed, there are many forces at work.  But at the moment, the force above all forces is the extreme levels of money printing being jointly carried out by the Federal Reserve and the U.S. Treasury.

Fed Chairman Jay Powell and Treasury Secretary Janet Yellen have linked arms to crank up the printing presses in tandem.

This is what’s driving markets to price things – from copper to digital NFT art – in strange and shocking ways.  But what’s behind the money printing?

Surely it’s more than progressive politics – under the guise of virus recovery – run amok.

Where to begin?

The U.S. national debt is a good place to start.  And the U.S. national debt is now over $28 trillion.  Is that a big number?

As far as we can tell, $28 trillion is a really big number…even in the year 2021.  How do we know it’s a big number, aside from counting the twelve zeros that fall after the 28?

We know $28 trillion is a big number based on our everyday experience using dollars to buy goods and services.  You can still buy a lot of stuff with $28 trillion.  In truth, $28 trillion is so big it’s hard to comprehend.

Nonetheless, $28 trillion is not as big a number today as it was in 1950.  Back then, the relative bigness of $28 trillion was much larger.  It was unfathomable.

Crime of the Century

…click on the above link to read the rest of the article…

economic prism, mn gordon, janet yellen, inflation, jerome powell, fed, us federal reserve, central bank, stimulus, government stimulus, united states

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