The latest FOMC statement on monetary policy was released on Wednesday afternoon. As was widely expected, the Fed kept its target federal funds rate the same. The release of the statement was followed by a press conference from Jerome Powell.
Powell does not exactly speak like Alan Greenspan did. He is a bit more coherent. At the same time, he really parses his words and holds back. He is careful with what he lets out. You know there is something wrong with our world when a few words from a central banker can dramatically change market conditions and cause billions of dollars in buying and selling.
Powell indicated that it would not be likely that we will see a rate cut in March at the next Fed meeting. On the one hand, he’ll say that inflation is under control. On the other hand, he’ll say that they aren’t confident enough yet (that inflation is under control) to lower rates.
Stocks were already down on the day, but they moved even lower. Gold was up earlier in the day and retreated in the afternoon, but still managed to show some gains. The 10-year yield fell a little bit and sits just below 4%.
For some reason, the statement dropped the language that “The U.S. banking system is sound and resilient.” Is it because people like me were making fun of it, or are they worried they will get made fun of when it is obvious that the banking system isn’t all that sound?
The Implementation Note from the statement shows that the Fed will continue to drain its balance sheet by $95 billion per month. It is for this reason that I do believe that the Fed is determined to bring price inflation under control, at least for as long as the economy seems to be humming along.
Things Change Quickly
Sometimes time just flies by in life. You wonder how we have entered another year. Or maybe you wonder how you’ve hit another birthday when that time comes. Sometimes things just hum along, until they don’t.
I remember the 2008 financial crisis quite well. There were warning signs in 2007 and early 2008, but things were mostly just humming along. All of a sudden, in September 2008, which happened to be right before a presidential election, the economy imploded. It seemed unreal at the time of the things that were happening. At the same time, life mostly went on. It was particularly devastating for some people, but not that big of a percentage. Most people kept their jobs and just watched their portfolios go down. Some people also saw housing prices plummet, but it wasn’t a huge deal for anyone who could comfortably afford the mortgage payments.
The point is that things change slowly, and then they change all of a sudden. They aren’t really expected. If they were expected, then the market crash or whatever would have already happened. If everyone expected stocks to crash next month, then most everyone would be selling now.
When the financial crisis finally does come, then it is like watching a train wreck from the distance. You just have to be careful not to get too close so that it doesn’t directly impact you.
We could be set up for a financial crisis and economic implosion that beats 2008. Even there, life usually goes on. It is more important to stay out of World War III than to stay out of a bad economic recession. Unfortunately, we don’t have much control over either one.
I know Jerome Powell is saying that a March rate cut is unlikely, but it is meaningless. The reason it is meaningless is because it can change in an instance. The economy could implode tomorrow morning, and we’d be seeing an emergency Fed meeting within days.
The yield curve is still mostly inverted, which seems hard to believe. This points to trouble ahead, but we don’t know how far ahead. I suspect that Powell knows there is trouble ahead. Politically, he is not allowed to admit this.
I have maintained that I don’t think the Fed will return to quantitative easing (money creation) just because stocks go down 20 or 30 percent. Maybe they will lower rates sooner if this happens. What will cause the Fed to return to balance sheet expansion is trouble in the bond market or bank troubles.
Don’t expect the Fed to bail out your stock portfolio. You can expect the Fed to bail out the banks as needed.