Mixed Messages Mess with Markets!
It seems strange that the mighty capitalist markets should be constantly waiting for the next pronouncement of a small, grey band of mostly unknown bureaucrats, most of whom – if not all – showing little evidence of having created any wealth in their own lives, sitting around conference tables in the Marriner Eccles building in Washington, to issue diktats about where interest rates must be.
But we go through this several times each year. And now we have just gone through it again. The Federal Reserve Open Market Committee met in the first two days of November, a meeting culminating with the announcement that it had decided to raise its influential policy rate, the Fed funds rate, by 0.75 percent effective immediately.
This is the latest in a series of Fed rate hikes that began in March when the central bankers finally and reluctantly confessed that inflation was not, after all, transitory, effectively confessing as well that they didn’t understand inflation or really know what they were doing. So, they began hiking rates: 0.25 percent in March, 0.50 percent in May, and 0.75 percent in June, July, and September.
And now once again in November. The target range now for this Fed policy rate is 3.75 to 4.00 percent effective immediately.
Wall Street – both debt (bond) and equity (stock) markets – follow this action as a matter of life and death. They know that by driving rates lower (by inflating the currency or money supply) for decades, the Fed’s manipulations were stove-piping money their way.
Oh, life was good. Very good.
But inflation having risen and begun to irritate the people, the Fed finally fell under some pressure to get it back down. This terrifies Wall Street which understandably doesn’t want to see its good thing come to an end. So, the Fed’s pronouncements are a very big deal. Wall Street watches for the least sign the blasted rate hikes will stop and that their happy days of free printing-press money will soon return.
The Fed concludes its meetings, issues a statement about its latest decision, and then shortly after the chairman, Jerome Powell answers the questions of a sycophantic corps of journalists assigned to the Fed beat.
We assigned a hapless member of our crew to follow the action on Wednesday and this is what he reported on the sequence of events.
On the release of the Fed statement, he watched in real-time as all the markets moved up. The real-time charts on CNBC were all awash in green. That is because the Fed’s statement read in part, “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” That was all it took. It must mean that the Fed was going to slow down its hikes, maybe before long stopping altogether, and even begin easing again.
The markets were exuberant. The Dow was up over 400 points. And when Powell took to the podium, they remained that way.
Until Powell spoiled the party, saying that they will continue “to look for compelling evidence that inflation is coming down.” Uh oh! Because there is no such compelling evidence to be found. Powell even went on to say, “Another unusually large [rate] increase could be appropriate at our next meeting.”
Well! That wasn’t supposed to happen. And with that short observation, the markets turned as one. They went south. Euphoria left the room. The buzz was killed. All the lines on all the charts turned red, the color of red ink.
After the markets closed, the Wall Street Journal swept up the debris with this headline:
Stocks Sink After Powell Signals Need for More Rate Rises
Fed chairman says rates will likely need to end higher than anticipated
So, by the end of the day, the Dow was down 500 points, the Nasdaq fell 366, and the S&P500 was off almost 100 points.
Not quite what Wall Street hoped.
Just another day in the fiat money and fake interest rate economy. As for ourselves, we think interest rates should be determined by real conditions of capital supply and demand. That would prevent distortions and malinvestment and the constant booming and busting cycles in our economy by artificially jiggering rates.
And we think gold is real money. Since it is real and can’t be printed, there is no need for the central banking apparatus that has spent more than a century destroying the dollar and bailing out its cronies.
But that’s just us.