The Fed “Skips”

Thanksgiving Day? You may have it. Christmas Day? You may have it. New Year’s Day? Again, you may have it.

Today is June 14 — Flag Day. It superexceeds them all.

Only Independence Day bulks larger in our pulsing patriotic heart.

And that heart — or what passes for a heart — glories today in celebration.

After Independence Day, only Constitution Day rivals Flag Day in our hierarchy of holy days.

Again, the rest you may have.

We refer not to the gold medal-positioned flag on recent display at the White House.

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We refer instead to the silver- and bronze-positioned flags, the junior flags — the flags of the United States.

May they bask forever in glory! May Old Glory bask forever in glory!

Yet even on this high and solemn day… we must tend to profane and worldly concerns.

For example, the monetary system of the United States…

Would the Fed “Pause” — or “Skip”?

The Federal Reserve had something to say today. It said that it was holding its target rate even.

No rate increase, no rate decrease, that is. The Federal Reserve has chosen to stand in place.

This was widely expected — the bulking majority of market soothsayers had forecast this inaction.

But they cannot quite discern the future. It is obscured by fog.

Is today’s standing-still a “pause” before actual rate decreases?

Or is today’s standing-still a mere “skip” before additional rate increases?

That is, did the Federal Reserve merely delay additional rate increases?

Recall, though somewhat subdued, inflation remains up and doing. It is active across several fronts.

The Federal Reserve must therefore keep the prospect of additional rate increases up its shirtsleeve.

Explains The Wall Street Journal:

Federal Reserve officials’ concerns about stubbornly high inflation could lead them to signal that they are prepared to lift interest rates again this year even if they hold them steady on Wednesday.

Sean Ring, Psychic

Morning Reckoning editor Sean Ring has performed an excellent crystal-gazing. He divined today’s “skip.”

Yet he also served Mr. Powell a sage morsel of advice:

From commentary this morning:

I’m sure he’s going for choice B, the skip. But he must execute this step delicately but firmly.

Powell must say something like, “We’re giving the market a month to catch its breath, then we’re coming back in full force. So be careful. You’ve got six weeks to sort yourselves out. Until then, I’ll be quiet. But we’re going to hike in July, so price it in.”

Then the belief he’ll hike again will be credible.

We’re not out of the woods with inflation, either on the consumer or asset sides.

He knows that…

It’s a delicate balancing act. But in the end, the Fed will attempt to skip.

Did the chairman take aboard Mr. Ring’s counsel? Did he “execute this step delicately but firmly”?

He did not. His mummeries were delicate — yet his mummeries were not firm.

They were constituted not of granite but of goo:

The skip — I shouldn’t call it a skip — the decision… I would almost say that the conditions that we need to see in place to get inflation down are coming into place… The things are in place that we need to see. But the process of that actually working on inflation is going to take some time.

One Cheer From Wall Street

The stock market took an instant swoon upon today’s announcement — the Dow Jones Industrial Average plunged some 300 gobsmacked points Why?

Explains CNBC:

The Federal Reserve paused its hiking campaign in June, but forecast it will raise interest rates as high as 5.6% before 2023 is over, according to the central bank’s projections released on Wednesday.

The Fed on Wednesday kept the key borrowing rate in a target range of 5–5.25%. But it was its projections, the so-called dot-plot, that moved markets, sending them lower as the central bank projected two more increases.

That is, Wall Street was hot for a “pause” — yet got a “skip.”

“We are pleased you did not raise rates,” stocks informed Mr. Powell — “but now you dangle before us two additional rate hikes? What gives, buster?”

Later in the day the stock market underwent a stabilization of sorts… in the manner that a handrail may stabilize a man following a buckling of his knees.

Powell’s Handrail

What “handrail” did the stock market seize? None other than Mr. Powell himself.

Stocks regained the vertical during his post-announcement talk. That was when he insinuated he would consider his impact on the stock market.

That is, Wall Street got a sly wink from him. And it was partially soothed by it.

Yet stocks remained partially wobbled the remainder of the afternoon.

The Dow Jones Industrial Average ended trading down 233 points. The S&P 500 actually scratched out a 3.5-point gain.

The Nasdaq Composite, meantime, recovered sufficient footing to post a 53-point advance.

Yet we spot the silver edge framing the gray cloud…

The Good News

It is a commonplace of knowledge that the Federal Reserve requires an elevated interest rate in order to combat recession — 4% or higher

This constitutes “dry powder” the Federal Reserve can draw upon to bombard the foe.

We hazard that recession lurks just beyond the horizon. We fear it will come barreling in before long.

Might the Federal Reserve’s monomaniacal pursuit of higher interest rates… that it undertook only after the emergence of a severe inflation… an inflation that the Federal Reserve itself helped turn loose… account at least partially for this recession?

Well friends, perhaps it might. It has likely helped fabricate the enemy it must soon confront.

Yet here is the sunny-sided and silver-lined news:

In this war Mr. Powell and mates will have loads of dry powder at their disposal.

Let us never again be accused of pessimism!

The Daily Reckoning