What a week this will shape up to be. The Federal Reserve has been having one of their regularly scheduled meetings covering rate policy and their taper plan. They met yesterday, and their meetings will conclude today in a few hours which will be covered by a press conference.
Publishing this on the release of the Feds statement. We’ll see if I’m retarded or not when comparing this to the meeting and press coverage.
Their previous meeting was covered by me here.
A Definition list for the abbreviations, words, and terms that I use.
The song for this meeting is Oxycotton by Lil Wyte. It’s fitting. Powell and the FOMC are drug dealers, and the market is having a withdrawal and needs sedation. Our dealer is uncertain if he can re-up just yet so when we show up unannounced at the trap house he’s gonna tell us a story about some real good heroin we had once and how his next batch is gonna be so fire, and hopefully we’ll walk out shaking and in a cold sweat but left with enough hope that we can make it another few weeks while our dealer can decide if he should risk his rent money on another package. Since I’m in a nostalgic mood as well, this was the hood-rat song in high school, and the shitboxes in this video fits the vibe perfectly.
Table of Contents
Introduction
The Fed’s Trilemma
What they won’t do
What they are trying to do
What they will have to do
Conclusion
1. Introduction
As has been covered here many times, The Federal Reserve has regularly scheduled meetings, these meetings were initially created to serve as transparency for the public to understand when, how, and why the Federal Reserve adjusts base lending rates, and how they use their other tools available to them to control the markets. Three weeks after the meeting, the minutes (typed transcript of what they want you to see) are released to the public. You can find a link to their schedule here.
These meetings and the press conference are intended to mimic a sense of transparency and open-ness, but in truth, the meetings are scripted almost entirely and the questions and media that are allowed to attend is heavily curated. The minutes that are presented afterwards are also not the minutes of a meeting where any decisions can be made, and are instead a prepared statement meant to mimic the statement Powell gives at the end of the meeting. You can usually catch the statement given by Powell in its entirety on Bloomberg Live at 1:30pm CST.
As previously covered, the FOMC’s current plan is as follows.
Doubling the rate of taper in mid-january
Concluding the net purchase of assets with printed money by March instead of in June
Three rate hikes in 2022 so that the overnight rate is 0.9% by the end of 2022
They claimed that the rate of taper doubled on January 15th. However, I have seen no slow down in the Federal Reserves rate of Acquisition of Mortgage back securities, despite their purchase rate supposedly being cut in half 10 days ago.
Nor have we seen any slow-down in total assets held by the Federal Reserve.
Now, the rate of taper being cut in half is for a period from January 15th to February 11th, so its possible that a slowdown in purchases may occur on the back end of this period, but at this point there has been no material change in the Federal Reserve’s activities. Almost all changes in the state of the market so far have been due to the actions of private entities anticipating the Fed’s taper.
The FOMC press conference will not touch on this, nor will any of the journalists ask this question as they probably didn’t even do the basic research of the Fed’s balance sheet before attending the meeting. The kinds of journalists that do this research are typically not invited to these press conferences.
The FOMC is in a really tough place, as the markets are presuming that our drug dealer is going to decide to pay rent this month instead of getting us some of that Afghan brown powder that we’re addicted to. If our dealer actually decides to pay rent, we may die from withdrawal symptoms. The markets have not considered how dire the consequences of that would be, and how far reaching the negative externalities of that would be for the basic functioning of our government. So the markets are going to keep piling on to that side of the trade (long dollar) as was discussed in the macro review a month ago.
Sounds wild right? The data says the Dollar is getting weaker, but in the financial markets, the Dollar gets bought up and actually gets stronger. So what we will be watching, and my outlook for the future few months is for most counter-inflationary assets to continue dipping in price until the Fed runs into that wall where the treasury bond auctions are concerned. That means most assets will be on sale for a good DCA over the next 2-3 months.
This creates the tough place for the Fed. Consumer level inflation will continue, and prices will not fall. However, the financial markets are moving opposite the consumer markets in anticipation of the Fed and they are going long on the dollar, which means that asset values will continue to be flat or down as I have been outlining here since the start. The Fed is very much a political entity that answers to the party in charge. Whether that party is the Democrats, or the Republicans, both of those parties answer to moneyed interests, meaning the Fed is going to be under pressure from lobbying interests and financial entities that are levered up to increase the trickle of heroin coming from the Federal Reserve. When that pressure combines with an inability of the treasury to pay their bills, the Fed will most likely fold and take their rent money to their distributor and get a fresh package.
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