The Federal Open Market Committee (FOMC) released its latest monetary policy statement, which is the last scheduled one for 2023.  As was widely expected, the Fed will keep its target federal funds rate the same, between 5.25% and 5.50%.

This came one day after the CPI numbers were released.  Consumer prices rose by 0.1% in November 2023, and the year-over-year came in at 3.1%.  The median CPI rose 0.4% for the month, while the year-over-year median was up 5.2%.

The biggest news that came out of the FOMC meeting is that they expect at least three rate cuts in 2024.  Fed officials must be rather confident that consumer price inflation will fall to 2% or less in the near future.

Remember that a few years ago, the Fed was saying that they wanted to average out to 2% inflation, although they never gave a time period.  Considering that we got close to 10% price inflation over a year ago and still have not returned to 2%, they should be wanting several months below 2% for an average of 2%.  But maybe all of that averaging stuff – which is never talked about anymore – only applied when prices were rising at less than 2% according to their data.

When Jerome Powell was asked about recession possibilities in his press conference, he gave a diplomatic answer and said that it is always possible that a recession could be coming.  He then said it is unlikely we are currently in a recession, which wasn’t really the question.  The question was whether we should expect one.

I think Powell is trying to not make the mistake of Bernanke and others who dismissed such warnings leading up to the financial crisis in 2008.  Powell knows that the Fed’s tightening is likely to lead to a recession, but he won’t say so directly.  But he also doesn’t want clips played back at a later date with him saying that there won’t be a recession in 2024.

New Bubble Highs

When the FOMC released its statement and the market digested that rate cuts were more likely next year, financial markets boomed.  Stocks went up.  Bonds went up.  Gold went up.  They all went up a lot.

The Dow surged past the 37,000 mark and hit a new all-time high.  It is hard to believe that this Everything Bubble is still going.  It is even harder to believe that the Dow just hit a new high after the yield curve has been mostly inverted for all of 2023.

The only thing that changed is that the Fed is admitting that there may be more rate cuts next year than what they originally indicated.  But the reason they are expecting to cut rates (the federal funds rate) is because the economy will be weak.  If the bubble implodes and we hit a new financial crisis, you can expect more than 3 rate cuts of 25 basis points.

The Fundamentals Didn’t Change

We already knew the Fed would likely return to a loose monetary policy if there was any kind of deep recession or financial crisis.  The Fed’s admission of more possible rate cuts next year is more of an admission that there is trouble ahead.  They aren’t just being generous to stock investors.

The yield curve is still inverted.  In fact, it just became more inverted after the FOMC announcement because long-term yields fell.

Perhaps the bigger thing that is being ignored is that the Fed is still draining its balance sheet by about $95 billion per month.  It is still indicated in its Implementation Note.  The CNBC article linked above does mention it too, and it says that there is no indication the Fed is going to stop this portion of its policy tightening.

The stage is still set for a massive recession.  Meanwhile, the bubble in the investment markets just got bigger.  The faster they rise, the harder they fall.

The damage has already been done.  It was done in 2020 and 2021 with the massive expansion of the Fed’s balance sheet.  You could say it goes back to 2008 with that massive expansion.

It’s not that the Fed’s tinkering doesn’t matter at all now.  You can see the impacts just from the FOMC’s statement.  But the massive misallocation of resources has already happened.  The Everything Bubble is already there as a result.  The only question is how long they can keep it going and how hard it will ultimately fall.