The Federal Open Market Committee (FOMC) released its latest monetary policy statement.  As expected, the federal funds rate was hiked by 75 basis points.  It is now in a target range of 3 to 3.25 percent.

Although stocks were higher in the morning, they quickly came down with the announcement and the expectations of higher rates and higher unemployment next year.  Stocks were volatile, but ended up down significantly for the day as a whole.

Surprisingly, gold actually finished slightly higher on the day, and this came in the face of a stronger dollar.  The euro is now trading at less than 99 cents to the dollar.

But the real story is the bond market and the yields.  The 2-year yield closed above the 4% mark for the first time since 2007.  And we know how 2008 turned out.

The 10-year yield is still slightly higher than the 3-month yield, so there isn’t a full inversion of the yield curve.  But the 2-year yield has been trading significantly higher than the 10-year yield for a couple of months now, and it was exaggerated more after the FOMC statement.

This tells us that there is going to be a recession ahead.  And even though Jerome Powell won’t directly answer the questions on a recession being baked into the cake, he is admitting that everyone should expect a significant slowdown, which is the most a Fed chair will ever admit about the future.

In his press conference, Powell gave a hypothetical example of a family that has most of its budget going towards food, gas, and clothes, and he acknowledged in his own way that they are hurting.  This was a little bit surprising, but I think he’s trying to justify the Fed’s actions that risk a recession.

He also said something about unemployment needing to go higher to control price inflation.  This is only correct in the sense that the Fed blew up the bubble that we have now.

To be sure, the only reason we are in this situation is because of the Federal Reserve’s prior monetary policy of low interest rates and massive monetary inflation.  Now the Fed is essentially forced to reverse course to fight the price inflation that it created.  As resources are reallocated, it will likely cause a rise in unemployment.

It is a mistake of “economists” who believe that there is some kind of trade-off between inflation and unemployment.  If you don’t tamper with the money and interest rates in the first place, then the misallocations won’t occur.  You can have an environment of low or no price inflation (or even deflation), coupled with low unemployment rates.

When the central bank is active, you can get a situation where you have high price inflation and relatively high unemployment rates.  They see this trade-off now only because of what the Fed has already done.

Buckle Up for a Wild Ride

The upcoming recession could be one for the record books.  Just look at the situation that the Fed is in now.

The yield curve is largely inverted, and it may still get worse.  Interest rates are several points behind the official price inflation rate.  The Fed is hiking its target rate and plans to continue to do so at its next couple of meetings, while the balance sheet is also slowly going down.

The Fed is aggressively hiking rates when the yield curve is already largely inverted.  And it can’t stop hiking without risking massive price inflation that is higher than what we have now.

How will the Fed fight the next recession?  Will it continue to drain its balance sheet and hike its target federal funds rate?

The mother of all bubbles is going to pop like nobody has seen before.  Housing and stocks have both been going down, but this is only the beginning.  We aren’t in the midst of the financial crisis yet.  This is only the first or second inning of a 9-inning game.

Nothing is safe right now.  My best advice is to use common sense and diversify.  You don’t want to be in debt outside of a manageable mortgage.  You don’t want to be heavy in stocks.  You won’t want to be in any of these highly speculative gambles like crypto.

The only hope out of this economic disaster is that more and more people will wake up to the fact that the ruling elite do not have their best interests at heart.  There needs to be a major shift in public opinion where the people stop allowing others to have all of this power.