The Federal Open Market Committee released its latest statement on monetary policy. The Fed will keep its target rate unchanged, in a range of 3.5% to 3.75%. The vote was 9 – 3. The 3 dissenting votes wanted to raise the federal funds rate by 25 basis points.
Typically, when the FOMC has a meeting with an announcement of its policy, the market knows what is going to happen. In some ways, the Fed actually follows market expectations. It was not as clear cut for this latest meeting.
Just the fact that there were three dissenters and nobody favored a rate cut tells us that Fed officials are concerned about the continued elevated price inflation.
Let’s remember that it wasn’t long ago that Trump was criticizing “Too Late” Powell for not lowering interest rates. The Trump lackeys that were appointed were favoring lower rates. Yet, now they are not favoring lower rates. This means they would have clearly been wrong (according to their own standard) if rates had been lowered earlier this year.
It is also funny that Kevin Warsh feels the need to say that the Fed will do everything necessary to fight inflation (while still inflating) and saying that the Fed is not accepting price inflation above 2%. Warsh is trying to get some confidence back in the U.S. dollar. But if Warsh really wants to bring confidence back to the U.S. dollar, he should stop inflating the money supply, and he should tell the government to get spending under control and to stop running massive deficits.
Meanwhile, Trump is holding his fire on the new Fed chair that he just appointed. Trump will come up with some nickname for Warsh when the economy goes bad. Trump will blame anyone but himself, even though he appoints the people that he later turns on.
Market Reaction
U.S. stocks took a big hit on the day. But it is noteworthy that the markets were already down before the Fed announcement. They actually started to come back immediately after the FOMC announcement, but then went to new lows later in the afternoon.
Gold and silver finished the day higher, although the metals have taken a beating over the last several months.
Perhaps the most notable thing was bond yields. The 10-year yield finished the day at 4.67%. The 30-year yield hit 5.20%. Short-term rates actually fell a little bit.
The yield curve that was inverted in 2023 and 2024 is no longer. It has mostly normalized in the sense that long-term rates are higher than short-term rates. Inverted yield curves have typically been a predictor of recessions after the yield curve normalizes.
While many Americans feel like they are in a recession because their wages aren’t keeping up with their expenses, we have not yet entered an official recession. Unemployment is still relatively low, and stock indexes are near all-time highs.
Recession?
Has the yield curve as a recession predictor failed this time? If it hasn’t failed, then we should be seeing a recession soon.
If we hit a deep recession, who knows how the Fed will react if price inflation is still above 2%? The Fed will bail out the major financial institutions and the bond market if necessary, just as it always has. The Fed will not bail out the stock market by itself.
If we get a deep recession, we can only imagine the executive orders (dictates) coming from Trump. He will try more tariffs and come up with a bunch of other socialist schemes while trying to blame the so-called Democratic socialists. Meanwhile, the left will blame it all on free market capitalism.
It’s good to be a libertarian and understand free market economics, but sometimes it would be easier to live in a state of naivety.