From Harley Bassman, the Convexity Maven, October 4:
Quipped my good friend and ex-Merrill Lynch sparring partner David Rosenberg:
“Cycles die; and you know how they die ? The Fed puts a bullet in its forehead.”
Last month I penned “Soft Landing” – September 7, 2022; and if you printed out a hard copy, my advice is to repurpose it to line your bird cage.
Federal Reserve (FED) Chair Jerome Powell clearly stated at his September 21 post-meeting press conference that their policy rate was headed to 4.60% sometime early next year unless inflation materially declined, which is unlikely to occur due to its lagging component structure.
The pressing question is which breaks first: the Bond market, the Stock market, the Housing market, or the Economy via rising unemployment.
As detailed previously, political shenanigans delayed Mr. Powell’s confirmation, paralyzing the FED in the summer of 2021 when Consumer Price Inflation (CPI) was already cooking at 5.4%. The FED tried to paper over the delay in raising its policy rate by asserting (perhaps sincerely) that this inflation was “transitory”. Painfully chagrinned, they finally lifted rates in March 2022 when CPI had reached 7.9%.
To affirm its credibility and Mr. Powell’s legacy, the FED has indicated they will continue to raise rates until inflation meaningfully descends to its 2.0% “target rate”, notwithstanding that CPI is a lagging indicator.With “transitory” becoming a dirty word, the FED has (temporarily) lost the ability to conduct policy based upon its projections, no matter its confidence. Thus, they are handcuffed to -boghafrois line- “headline” inflation, which cannot decline quickly enough to stave off further policy tightening.*****I shed no tears for the embarrassment of Team Transitory who vociferously insisted that the FED was not printing money, and that inflation was the result of short-term imbalances that would quickly correct. However, I do have some sympathy for the FED who, despite claiming independence, are still an arm of the Government trying to balance competing interests.No matter, the FED has effectively purchased a berth on the Titanic after it hit the iceberg. Mr. Powell is conducting the band while the market is sending up rescue flares and we all wonder who will find a lifeboat....
....MUCH MORE (11 page PDF)
