The FOMC released its latest monetary policy statement. As was expected, the Fed held its target federal funds rate between 5.25% and 5.5%. However, the Fed does expect to have one more rate hike before the end of the year.
The Fed is also continuing to reduce its holdings of bonds. The Fed’s balance sheet still has a long way to go to get anywhere close to its February 2020 level, and it will likely never get close to that again. But it has come down nearly $900 billion now from its all-time high.
Jerome Powell held a press conference and continued his version of “Fed speak”. It isn’t quite like how Alan Greenspan spoke. It is much clearer. At the same time, most of what he is saying is meaningless. It is coming from a bureaucrat who believes in central planning.
Ben Bernanke 2005 – 2007
Ben Bernanke (aka Helicopter Ben) became chairman of the Fed in early 2006. Even before he took that position, he was saying that there was no housing bubble. By 2007, Bernanke was saying that any trouble should be limited to the sub-prime market.
He was amazingly wrong. We then got a major financial crisis coupled with a massive bust of the housing market. It was good for the people with money looking to buy a house around 2010 to 2012. It was not good for those who could not afford their mortgage and went underwater. It was not good for the American taxpayer bailing out the banks.
When the so-called expert scientists and doctors were talking about COVID in 2020, maybe people should have reflected on the expert economists who get the big things really wrong. Bernanke was supposedly an expert on the Great Depression, and we ended up with the worst economic downturn since the Great Depression.
Most of the damage was already done before Bernanke became Fed chair, but it’s not like he was warning about trouble. He was trying to paint a rosy picture. And then when everything went bad, he went on a wild money creation spree leading to where we are now.
Jerome Powell and the “Soft Landing”
In his press conference, Powell stated, “A soft landing is a primary objective. That’s what we’ve been trying to achieve for all this time.”
The problem for Powell and company is that they have to fight the inflation that they created. That means a continuation of reducing the balance sheet with the possibility of more rate hikes.
The yield curve has been heavily inverted for quite some time. It has been inverted for all of 2023. The spread is almost unprecedented. And the Fed expects yet another rate hike in the face of an inverted yield curve.
Powell is not being as bold as Bernanke. He is being a bit more cautious. But he isn’t exactly warning of a recession either.
But that’s exactly what we’re going to get. Just because the stock market or real estate market haven’t tanked yet, it doesn’t mean it won’t happen.
Janet Yellen recently talked about lags in the economy. She was trying to spin it in a good way, like consumer price inflation coming down. She is right that there are lags. And one of those lags is a major recession happening after the inverted yield curve. The yield curve will probably return to “normal” before the worst of the recession appears.
If there is a soft landing, I may have to reassess my worldview on money and economics. But I don’t think the Fed can keep this tight money policy and somehow engineer a soft landing for the economy.
The yield curve is flashing danger ahead while the Fed chair acts like everything is just fine. They just need to make a few more tweaks to set everything straight. The bond market has a different idea for what’s ahead.