June 23, 2021

The Fed Blinks...Again!

The Fed Blinks...Again!

Last week it appeared that the stars had aligned. That, for the first time since the Pandemic's Economic Lock-Down, that the Fed would return to a more normal interest rate policy.

 

Inflation, seemingly the Fed's most important indicator for raising rates, inflation was now above their 2% benchmark. Employment, the other principal mandate, was rising. We had seen job vacancies skyrocket, to nearly 10 million available positions. While the unemployment rate had slipped to just 5.8%, nearly half of the rate of last year at this time.

 

So it looked like the Federal Reserve, was positioning the country to see a slight raising of interest rates. In fact, that's essentially what Jim Bullard, President of the St Louis Fed, said in an interview on CNBC last Friday. Bullard indicated that he saw the first interest rate hike coming sometime in 2022. Just a few months from now.

 

And in their usual pattern of preparing the financial world for a policy change, The Fed then marched out the Bank Presidents around the country to present speeches this week. Something that rarely happens in the summer. And almost never happens without an important policy announcement.

 

So putting this all together, the Street was convinced that higher rates were right around the corner. And in what's become a typical pattern, the Street in just 7 sessions declined about 2,500 points.

 

And notice, the Street decline was not because the Fed had actually raised rates. But just because the Fed was thinking about raising rate, in a few months from now.

 

It didn't matter. Like a petulant child threatened to have it's candy taken away, the Street declined on the rumor.

 

But fear not. Yesterday Chairman Powell put it all to rest. Backing away from the hawkish statements of last week, Powell seemed to indicate that the Fed will continue to support the economy in any way needed. And he thereby seemed to push back those interest rate hikes, probably for another year or so.

 

It was another about face by the Fed. And it is all part of what is increasingly a interaction between Wall Street and the Federal Reserve. Each time the Fed want's to get tough, and raise rates Wall Street has a conniption. The Street swoons, and Powell comes to the rescue.

 

It makes for high drama, but poor policy.

 

The Fed knows that someday we must return to a more normal interest rate policy. To maintain these artificially low rates, simply aids the financial class. While harming those in the lower income brackets, such as those on fixed income, the savers. and the retired.

 

Now today we will have two more Fed speeches. First from Michele Bowman, the first governor to fill the newly created seat for Community Banks. And then this afternoon Ralph Bostic, President of the Atlanta Fed.

 

It will be interesting to see how these two governors manage to weave their way through, and economy that eventually needs to return to some normalcy, and Wall Street which apparently wants low rates for ever.

 

 

#3

 

Before those two governors speak we will have one more interest rate to look at. The Mortgage Bankers Association will announce the latest 30 year rate. Expected to be fractionally higher than last week.

Last week it appeared that the stars had aligned. That, for the first time since the Pandemic's Economic Lock-Down, that the Fed would return to a more normal interest rate policy.

 

Inflation, seemingly the Fed's most important indicator for raising rates, inflation was now above their 2% benchmark. Employment, the other principal mandate, was rising. We had seen job vacancies skyrocket, to nearly 10 million available positions. While the unemployment rate had slipped to just 5.8%, nearly half of the rate of last year at this time.

 

So it looked like the Federal Reserve, was positioning the country to see a slight raising of interest rates. In fact, that's essentially what Jim Bullard, President of the St Louis Fed, said in an interview on CNBC last Friday. Bullard indicated that he saw the first interest rate hike coming sometime in 2022. Just a few months from now.

 

And in their usual pattern of preparing the financial world for a policy change, The Fed then marched out the Bank Presidents around the country to present speeches this week. Something that rarely happens in the summer. And almost never happens without an important policy announcement.

 

So putting this all together, the Street was convinced that higher rates were right around the corner. And in what's become a typical pattern, the Street in just 7 sessions declined about 2,500 points.

 

And notice, the Street decline was not because the Fed had actually raised rates. But just because the Fed was thinking about raising rate, in a few months from now.

 

It didn't matter. Like a petulant child threatened to have it's candy taken away, the Street declined on the rumor.

 

But fear not. Yesterday Chairman Powell put it all to rest. Backing away from the hawkish statements of last week, Powell seemed to indicate that the Fed will continue to support the economy in any way needed. And he thereby seemed to push back those interest rate hikes, probably for another year or so.

 

It was another about face by the Fed. And it is all part of what is increasingly a interaction between Wall Street and the Federal Reserve. Each time the Fed want's to get tough, and raise rates Wall Street has a conniption. The Street swoons, and Powell comes to the rescue.

 

It makes for high drama, but poor policy.

 

The Fed knows that someday we must return to a more normal interest rate policy. To maintain these artificially low rates, simply aids the financial class. While harming those in the lower income brackets, such as those on fixed income, the savers. and the retired.

 

Now today we will have two more Fed speeches. First from Michele Bowman, the first governor to fill the newly created seat for Community Banks. And then this afternoon Ralph Bostic, President of the Atlanta Fed.

 

It will be interesting to see how these two governors manage to weave their way through, and economy that eventually needs to return to some normalcy, and Wall Street which apparently wants low rates for ever.