The Federal Open Market Committee (FOMC) released its latest monetary policy statement. There wasn’t total certainty in what the FOMC would do, but it did raise its target range for the federal funds rate by 0.25%. The target range is now between 2.25% and 2.50%.
The Fed is now saying it expects two rate hikes in 2019 instead of three. Therefore, this was being labeled as a dovish rate hike by some, which I suppose is something of an oxymoron.
The financial news media is screaming that the Fed has hiked rates again. This is only sort of true. It raised the target federal funds rate, which is the overnight borrowing rate for banks. It did this by hiking the interest rate paid on bank reserves. But this does not necessarily translate into market rates going up.
The short-term yields initially went up on the news, but finished the day mostly flat. The longer-term yields fell meanwhile. In other words, the yield curve has flattened more.
The 30-year yield is now at about 3%, which would have seemed highly unlikely a few months ago. The 10-year yield is below 2.8%. There is slight inversion between the 2-year yield and the 5-year yield.
I like to compare the 10-year to the 3-month yield. That spread is now less than 40 basis points (0.4%). We could be just a matter of a few months away from an inversion there if things continue. If things really get crazy, there could be an inversion within weeks. That’s not my prediction, but I am just saying that it is not impossible.
An inversion of the yield curve is a major warning signal of a recession.
The stock indexes were largely up on the day when the FOMC statement was released. Stocks quickly gave up their gains on the day, and they continued downward. I watched some of the market movement live, and it was quite volatile for a while. There were 100-point swings in the Dow within minutes.
The Dow finished down over 350 points, while the Nasdaq was down over 2%. The Dow and S&P 500 both finished at lows for 2018.
Jerome Powell Speaks
Jerome (Jay) Powell, the chairman of the Federal Reserve, held a press conference shortly after the release of the statement. There were a few interesting things to note.
Powell was asked numerous times (with slight variations) about Trump’s pressuring the Fed with his tweets and comments. Now that Trump is president, he has become even more of a low interest rate guy. He has taken ownership of this economy, which was a poor political calculation on his part. I suspect that when things get worse, he will blame the Fed even more than the Democrats.
The Fed will be to blame, but it will be more for its actions from 2008 to 2014 than from its actions today. The Fed’s tightening is just helping to expose the malinvestments from the Fed-generated boom.
Powell was not about to flame up a battle with Trump. Powell mostly sidestepped the questions by just saying that the Fed is an independent entity and is acting without political consideration.
This is ironic given the fact that the Fed chair himself was nominated by Trump. The Fed exists because of the federal government and politics. The Fed holds a monopoly over the nation’s money supply.
Thankfully, Powell was also asked about the Fed’s balance sheet. He replied that the balance sheet reduction program will continue as planned.
The Fed is now draining approximately $50 billion per month from its balance sheet by not rolling over maturing Treasury debt and mortgage-backed securities. While it has a long way to go to unwind QE1, QE2, and QE3, it is not insignificant either.
The Fed nearly quintupled its balance sheet from 2008 to 2014 to well over $4 trillion, and it is never going to reduce it back to anywhere near the levels of 2008. But at a reduction rate of $50 billion per month, that is $600 billion per year. If the economy keeps softening, I expect the Fed to put a halt to this tightening in 2019, despite what Powell says now.
This sets the stage for an interesting 2019. Will it finally be the year that the massive bubbles pop?
Some people are so contrarian that they don’t expect a recession because so many people are now talking about the possibility of one. But we live in the internet age, where you can find opinions all across the board easily.
I listened to some of the people on CNBC today after the FOMC announcement. There were several guests who were essentially saying that there are no bubbles. And you even get a few saying that now is a good time to buy. So there are plenty of bull optimists out there still.
If anything, the establishment media might be a little less hesitant to talk down the economy than in times past because they are so anti Trump. I wouldn’t really listen to the establishment media one way or the other, except for possible entertainment value.
The main thing to watch is the yield curve. And with the latest Fed move, the yield curve just flattened more.