Federal Reserve Interest Rate Meeting

Powell Holds the Narrative up high

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

1. What They want you to Think

2. The Press Conference

3. Conclusions

1. What They want you to Think

Powells Initial Statement from today can be listened to here.

It’s important to note that in his initial statement, when speaking about inflation, there is absolutely zero mention of the effects from money printing, instead Powell blames inflation on supply chain woes and frames the Federal Reserve as using its tools to save people from inflation. If you are ever expecting them to admit that injecting trillions of dollars into circulation caused inflation, just forget about that fantasy.

The factual promises that were made, are as follows

1. Doubling the rate of taper in mid-january

2. Concluding the net purchase of assets with printed money by March instead of in June

3. Three rate hikes in 2022 so that the overnight rate is 0.9% by the end of 2022

This means that no immediate changes have been made as of yet. This is perfect narrative crafting for the markets. The markets take this statement as being bullish for the dollar, while the Federal Reserve has done nothing yet except speak about what they want to happen. In the early days of a taper, its very easy to speak a narrative into existence without having to face any of the cold reality that the math entails. All that is required, is for the markets to believe him. And today, while the Fed is still printing $105B a month, the markets aren’t really pressuring anyone to disbelieve yet. But as that monthly printing slows, the markets will begin to feel that pressure, and we may start to see some heretics emerge within the mainstream.

2. The Press Conference

The press conference starts at 7:55:

A lot of the questions were focusing on employment, which is not really related to what is actually going on and just a statistical game. One of the reasons that employment is talked about so much is because the Federal Reserve has implied that one of the levers they are looking at is for full employment. This is an impossible goal, especially through monetary policy and provides a good excuse for the Fed to delay anything they want. For the most part we can ignore talk about unemployment, as we know, the stats are severely juked and real rates of unemployment are probably 5 or 6 time higher than what is claimed by the Bureau of Labor and Statistics. This is done on purpose, the more they can distract with unrelated unemployment talk, the less people can talk about inflation and consumer pricing.

My notes on interesting questions:

• CNBC quoted Milton Friedman, and implied to Powell that inflation would continue for quite a few months or even a year after the money printing stops. Powell dodges this question by implying that because the markets react immediately (DXY jumps) that this also has a direct impact at the consumer level. This is of course a non-answer where Powell implies that paper trading at the NYSE is equivalent to consumers experience at the grocery store. They, of course, are completely different things.

• The AP asked if Omicron could delay rate hikes while implying that Omicron could cause disinflation (LOL). This of course gives the Fed an easy excuse that they can fabricate at any given moment if the markets react to hard to the taper. Instead of saying we aren’t going to hike rates, or we are going to keep the money printers on because the markets are going down too much; they can instead say “Omicron has caused too much disruption and uncertainty, so we will continue our existing policy until Omicron is under control.” A statement like that implies that money printing has nothing to do with asset prices and instead that CovID’s nerdy little brother is hurting the S&P. This was a softball question, prepping people for potential narrative changes. I wouldn’t be surprised if this question was seeded to the AP ahead of time.

• Bloomberg asked about why the forecast for inflation in 2022 and 2023 were not adjusted despite the 2021 inflation forecasts having to be forced to be adjusted. Powell claims that they expect the supply chain bottlenecks were alleviated and that they expect Fed policy to bring inflation down. This is a hint for how the markets will treat future CPI releases. As we see monthly Consumer Price Index releases come out in the future, if they are still high we will start to see stronger reactions from the market.

• Market News asked about timing reductions of the balance sheet. Powell stated they hadn’t made any decisions about when to start reducing the balance sheet, meaning they probably aren’t even thinking about that as a possibility. As a note, The Fed’s balance sheet is currently equivalent to 38% of US GDP. As another note, estimates of US GDP are significantly overestimated so long as inflation is incorrectly calculated.

  

I will note that the zoom press conferences actually function a bit better than the in person ones they had before. The in person conferences would often have members of congress and the senate present and they would ask some of the most irrelevant questions. Despite being curated, this format is much more focused and sticks to the script for how and when they plan to lie to us.

3. Conclusions

My conclusions from the questions are that for now the narrative remains stable. No one has sufficiently shaken the tree just yet, and for now the S&P and other broad indexes are still flat, so there is no reverse wealth effect yet for people to start screaming about. As I have stated before, we will be tracking treasury bond auction health to identify when it is likely that the Fed will be forced to reverse their current attempts to taper.

Understand, that this is also the null hypothesis of this theory. If the treasury bond auctions can remain healthy and avoid significant interest rate spikes outside of the range that the Fed is trying to hold them within, then this would mean that the Fed will succeed. Again, I do not think this is mathematically possible as withdrawing $120B of monthly buying liquidity has consequences to the market. But this is how I can be proven wrong, and this is also how we can preserve our purchasing power. Hold that dry powder for something else if we don’t get this signal.

As I have stated before, investments can have very large impacts on our emotions. A bad investment can derail an entire life. They can end marriages, kick-off years of depression, drug use, and suicide. Just like a good investment can absolutely change peoples entire outlook, demeanor and well-being. This is one reason why it’s important to manage your investments so that the riskier plays do not represent too large a portion of your wealth and net worth until you hit a certain point. If you have enough guaranteed income to cover all of your expenses in USD, from there on, you can invest as much as you want, so long as all of your needs are covered. I am in such a position, probably over-exposed to crypto, but I simply do not care, and could certainly live through another successful (until it failed) taper cycle from the Fed with a smile if one occurred. I just don’t believe this is mathematically possible anymore.

Considering that we will likely have a few months until the narrative breaks, I will begin doing reviews of a few crypto protocols that I like and think have significant room for growth, the first of which will start next week (or earlier if I get to it). If you are DCAing in, obviously you want to start with BTC and ETH. My reviews will be of alternate protocols that I believe have some room to grow. My view of a successful investment in an Alt, is that it outperforms BTC or ETH. If it can’t do that, you are much better off just buying ETH or BTC since they are less risky. This is how we will measure the performance of anything I recommend. And as I covered in Section 5 of my first forecast post, many reviews of crypto are paid for and not real reviews. This is how most all review media functions. Nothing on this substack will be paid for. And when I use affiliate links I will call this out, and at a later point will make a post explaining how affiliate links work.