Todays post will be about what the US FOMC (Federal Open Market Committee) meeting means, which was referenced in Section 4 of this weeks Forecast Post.
Please Remember that the Conclusion at the end serves as a TL:DR for those of you just looking for the high points.
Table of Contents
Rate Decision
Press Conference
Market Impacts
Conclusion
1. Rate Decision
A rate increase of 0.75% to the overnight lending rate brings the Overnight lending rate to a range of 1.5%-1.75%.
The Fed also released a set of economic projections alongside the meeting that can be downloaded here from the Fed’s official site.
Their projections are almost complete fantasy but we’ll review them here anyways.
For GDP, their projections were all revised down for the year 2022 by about 1%, but even the lowest projection by the US FOMC was for 1-1.1% annual GDP growth. When we get Q2 results and they are under 1% or possibly even negative again, I wonder how much lower these will be revised?
They are slowly dragging their expectations for core inflation higher and higher. I think the US FOMC genuinely does not want to believe that ~2 years of massive money printing would have consequences that lasted for more than a few months, and I suspect they still have not come to grips with this reality. Even if the Ukraine conflict gets under control and China does not make any further moves to try and starve the west out, we still have a lot more inflation to go through. Not to mention, how does the FOMC expect that ~9% CPI to come down enough for the average of 2022 to be 5%? The next 6 months of CPI data will have to be drastically different from the first 6 months, yet the overnight lending rate isn’t even at 2% yet. This chart seems to be expecting some sort of miracle to occur without any intervention from the committee members. These people live in a fantasy land, or they are just blatantly lying. I can not tell the difference.
They seem to have an expectation that the overnight lending rate will be at 3.5% by the end of the year. They only have 4 more meetings for the rest of the year. This implies that each meeting will have a 0.5% rate hike moving forward. In this, they may very well be being truthful in their current expectations. But ask yourself, what expectations can you have of the US Treasury’s ability to pay back the $30.5 Trillion in bonded debt when the overnight lending rate is 3.5%. How much might they be paying on the 3 year treasury bond at that point? Currently the 3 Year treasury yield is 3.5%. Will it be at 5.5%? 6%? 8%? Who knows? The Federal Reserve is no longer in control of bond yields. And when they start selling additional treasuries into the markets, they will only drive interest rates on those treasuries even higher.
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