Was This Fed Meeting Really “Hawkish?”
The Federal Reserve wrapped up its June meeting. While the central bank didn’t raise rates, the messaging coming out of the FOMC was widely viewed as hawkish. But was it really?
We don’t think so. In fact, the Fed’s messaging was extremely dovish. And the fact that it continues to ignore inflation doesn’t bode well for the future.
Most of the media attention focused on the fact that the Fed pushed up its projection for interest rate increases into 2023. But the Fed made no substantive policy changes. And it didn’t even indicate when it would reel in quantitative easing, although Fed Chairman Jerome Powell did acknowledge that the committee discussed the matter.
“You can think of this meeting that we had as the ‘talking about talking about’ meeting,” Powell said.
But Powell reiterated that the central bank would give plenty of warning before it actually starts tapering its bond-buying program.
Nevertheless, the markets and mainstream financial media obsessed over the possibility of rate hikes. At the March meeting, the FOMC held firm to its projection that it would not raise interest rates until 2024, but now the so-called “dot-plot” shows two rate hikes in 2023.
As far as inflation, the Fed raised its CPI projection to 3.4%. That was a full percentage point higher than the March forecast, but the central bank continues to categorize inflation as “transitory.”
“Our expectation is these high inflation readings now will abate,” Powell said during his post-meeting press conference.
An economist told CNBC the Fed’s tone was unexpected and speeding up the pace of rate hikes doesn’t quite line up with its inflation narrative.
The Fed is now signaling that rates will need to rise sooner and faster, with their forecast suggesting two hikes in 2023. This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.”
There was more data that came out indicating inflation is much hotter than the powers-that-be are telling us, specifically import-export prices. Both came in much higher than expected. This doesn’t indicate “transitory” inflation. The only thing transitory about these prices is that they’re getting worse. We’re transitioning from bad inflation to horrible inflation and the Fed is completely oblivious to what’s going on.
Prices aren’t going up because the economy is reopening or due to supply bottlenecks. The main reason that prices are going up is because the Federal Reserve is printing all of this money and will continue to print more.
After the Fed statement came out, gold sold off, the dollar gained and the stock markets tanked. The markets clearly perceived the Fed messaging as “hawkish.” The Fed isn’t being nearly as hawkish as people are making it out to be. All the Fed really did was acknowledge that inflation is no longer running “persistently” below the 2% target. In reality, all they acknowledged is that we’re no longer running persistently below a number that we’ve blown through.
But the markets didn’t key in on what the Fed actually did. They focused on the projections, particularly the “dot-plots.” In theory, we’ll now see two rate hikes or more some two years from now. This is an insignificant change in the big scheme of things. It’s spitting in the ocean compared to inflation. Think about it; how much higher is inflation likely to be in two years if the Fed stays at zero and doesn’t even raise interest rates for the first time until 2023 and only does it by 25 basis points?
And the entire time, the Fed will continue to monetize all of the US government debt.
During the post-FOMC meeting press conference, Powell even walked back some of the “hawkishness” of the official statement. It was one of the most dovish press conferences we’ve seen. In effect, the Federal Reserve is simply shrugging off the big increases in consumer prices.
For instance, Powell downplayed the dot-plots.
“The dots are not a great forecaster of future rate moves … it’s because it’s so highly uncertain. There is no great forecaster — dots to be taken with a big grain of salt,” he said.
He also tempered optimism about the economic recovery.
“Lift-off is well into the future,” he said. “We’re very far from maximum employment, for example, it’s a consideration for the future.”
But even after the press conference, markets continued to price in this supposedly “hawkish” Fed pivot.
Imagine what the markets would be doing if they actually had to brace for tight monetary policy, not this mamby-pamby phony version of it. What if we actually had Paul Volker tightening monetary policy? Imagine what would happen. All hell would be breaking loose. And that is exactly what is going to happen when markets are repriced for reality instead of fantasy, which is what they’re priced for now.
Keep in mind that leading up to the 2008 financial crisis, mortgages were mispriced along with the financial institutions surrounding the mortgage market. The number of assets that are mispriced today far exceeds the number of assets that were mispriced back then. And I think they are mispriced by an even wider margin. What this means is that at some point in the future, and I don’t think it is the distant future, it is the near future, and again, that doesn’t mean tomorrow, but it’s going to happen soon — the reality is going to have to rear its ugly head just like it did in 2008, and all of these mispriced assets are going to be repriced to reality. But because there are so many of them this time and they’re mispriced by so much greater a degree, all hell will break loose.