The FOMC released its latest monetary policy statement.  It was not clear whether the Fed would lower its target for the federal funds rate, but investors seemed to be betting that it wouldn’t happen this time around.

The FOMC did not lower its target rate, and stocks held up pretty well, which indicates that investors got what they expected, or better.  When I say “better”, I mean from the perspective of the stock bulls who always want lower interest rates and easy money.

The reason stocks reacted somewhat favorably is because the statement dropped the word “patient” from last time, meaning that the Fed is more likely to act in the near future. In addition, in his press conference, Fed chairman Jerome Powell said that the case for somewhat more accommodative policy has strengthened.

Stocks weren’t the only thing to rise.  Bonds went up, and gold went up.  The 10-year yield is now sitting around 2%, which is far below what most people expected six months ago.  The 10-year yield is still below the 3-month yield, which indicates coming weakness in the economy.

To be more precise, there is already weakness in the economy.  The malinvestment has already happened.  Resources were diverted to things that were not necessarily their best use in accordance with consumer demand.  It’s just that the weakening is not really evident yet, except for those of us actually looking at the yield curve.

James Bullard is watching the inverted yield curve.  He spoke last year about the flattening yield curve.  He was against rate hikes at that time.  He was the one dissenting FOMC voting member in the current statement. He thought the federal funds rate should be lowered now.

I don’t agree with him in his policy prescription.  Even though there is a coming recession, the Fed shouldn’t be artificially lowering interest rates, although I admit I don’t technically know what they should be.  Of course, that is the point.  The Fed shouldn’t be dictating interest rates at all.  It should be done by the free market.

Still, I think Bullard is right in his concern.  He knows there is trouble on the horizon.  Maybe the others do too and just don’t want to sound the alarm bells.

A Demotion for Powell?

This all comes on the heels of whining from Donald Trump.  During his campaign in 2016, he talked a few times about the Fed blowing up bubbles due to low interest rates, or at least something to that effect.  He also said he was a low interest rate guy, but people thought he was referring to himself as a businessman and not a politician.

In other words, when Trump was in business and buying real estate, he liked the low interest rates. He took advantage of the low rates to buy properties.  But this doesn’t mean that you have to think it is necessarily good policy for the country.

Ever since Trump became president, he has been an advocate for lower interest rates, which is implying a looser monetary policy.  I guess he wants to blow up the asset bubbles even bigger, as long as it is on his watch.

The other day, Trump was asked if he wants to demote Jerome Powell.  Trump’s response was, “Let’s see what he does.”  Now we know that the Fed is not really an independent institution, but Trump is really putting it out there that it is a politicized institution.

If Trump is going to try to fire the chairman of the Federal Reserve for not lowering interest rates, what is the point of having a Fed chair?  Maybe Trump would just like to dictate monetary policy by himself. He is already telling the president of China that he better show up for a meeting.

When Powell was asked about his job in the press conference, he responded, “I think the law is clear that I have a four-year term, and I fully intend to serve it.”

This whole story almost fits perfectly with the whole Trump presidency.  Trump is a disaster in many ways, but he actually helps to expose the corrupt system, even if it is sometimes inadvertent.  In this case, he is clearly showing how it is in the best interest of the current president to have a loose monetary policy.  He is also showing that the Fed is a political institution.

That Which is not Mentioned

There is one area that gets very little attention.  You could read several “mainstream” articles on the Fed’s meeting today, and you probably won’t see it mentioned.

You have to look at the Implementation Note from the FOMC statement. It says that the Fed will continue to reduce its balance sheet by not rolling over $15 billion per month in Treasury securities and $20 billion per month in mortgage-backed securities. In other words, the Fed is still reducing its balance sheet by $35 billion per month.

This may not seem like a lot in the context of the balance sheet having been over $4 trillion, but it is important to realize that the Fed is still in deflation mode.  With all of the talk about interest rates, this somehow gets left out.

This just adds confirmation to me that a recession is highly likely in 2020.  It could happen before 2019 ends, but I think 2020 is the best bet right now.

Let’s remember that the yield curve inverted back in 2006.  The Fed started lowering its target rate in 2007 before the official recession began.  So the Fed acted, but the recession happened anyway.

This is an important lesson because it tells us that it doesn’t really matter what the Fed does at this point.  Barring some version of hyperinflation, the imminent recession cannot be stopped. It probably can’t even be delayed much.  It doesn’t matter if the Fed drops interest rates in July.  It can’t stop the coming correction.

There is an inverted yield curve, the Fed is still in monetary deflation mode, and stocks are near all-time highs.  This is a recipe for disaster, especially for those who have a good portion of their net worth tied up in stocks.