Tightening By Paper Cuts

Tightening By Paper Cuts
Photo by Good Faces / Unsplash

The market didn't believe it.

The Fed has been running monetary policy like a drunken sailor on shore leave for decades but particularly since 2008. Need a coupla bucks? Here's a trillion.

Bernanke, Yellen, and Powell all handed out money like Jehovah's Witnesses handing out pamphlets.

But it looks like Generous Jerome Powell is no longer generous but becoming a tightwad.

The market expected Fed Funds to peak in the 1Q2023, then early 1Q2023, now June 2023. First they thought the peak would be high 4.00 level, then 5.00%. Now, 5.25%.

The date of the peak Funds rate keeps getting pushed back and get higher. This is not over yet. We will rates break 6% and they won't peak until late this year.

But, and it is a bit but, Powell may repeat the Volcker Mistake and ease too early. Volcker believed that he had defeated inflation but had crushed the economy so started to ease. But inflation came back with a vengence and Volcker had to tighten even more to finally put a silver stake in its heart.

To me, i have largely expected for Powell to make a Voldker Mistake. Why? Because of Powell's massive easing in 2020. Yes, it was a crisis but he added am amazing $4 trillion to the money supply over a lunch from a hot dog stand. The biggest monetary easing in US history.

So my feeling was that he would go Full Banana Republic if the labor market showed any signs of weakness.

So far, the headline labor stats have been strong though weakening around the edges. Big Tech is laying off faster than a young Dubai man in a Lambo.

Frankly, I thought the economy would be weaker by now. Manufacturing is already in a recession but the rest of the economy is hanging on.

I believe that inflation will stay higher longer so the Fed would have to stay tight longer and higher than the market expected. Now the market is catching up with me and looking for the Fed to slow the tightening. They no longer look for Powell to take a chain saw to interest rates but to tighten by paper cuts.

Look for bonds to dip near term and for the stock market to also dip over the next couple of weeks. Gold will also dip but the dollar will rally. All of these moves should be considered to be countertrend moves only not changes in trend.