Peak Policy Error

What anyone can say for sure is that 2019 hit a rough patch where there was only supposed to have been smooth sailing. The Federal Reserve rather embarrassingly had pitched a sequence of rate hikes needed to further smooth out the sailing only to instead begin battening the hatches with rate cuts (and then, following some “unknown” flash in repo markets, not-QE5).

However much it went wrong, we all can at least agree it didn’t go right.

The best they could do was “sentiment”; to assert how negative feelings beyond the countries involved must have spread around the globe.

Others fell back on their conventional training. As I wrote a few months ago, anticipating what’s about to happen, when in doubt just shout Fed, Fed, Fed:

And Economics demands total fealty to the central bank (whichever one).

So, if an economy is rip-roaring one day but careening toward recession seemingly the next, the first (and last) place you’re supposed to look for answers is in the direction of monetary policy (even though there’s no money in it).

The crass disappointment of 2019, this group tried to say, was simply the dreaded “policy error.” The Fed had raised rates a notch or two too far (and QT-ed too much), stalling the economy and requiring rate cuts (and not-QE) to rescue it.

Global recession. Global reserve currency. Global dollar shortage. Euro$ #4, not any of that nonsense.

I don’t believe the public was buying the policy error, as shiny a silver lining as there could be, but like the ultimate destiny for 2019’s economy we’ll simply never know.

To revisit this again from February, what we are about to witness unfold is increasingly likely (if not already), “an economy is rip-roaring one day but careening toward recession seemingly the next.”

As Emil Kalinowski has repeatedly warned, “they” are going to try to take credit for it again. Yes, credit.

This time, unlike last time, the CPI and PCE Deflator actually did go way up.

That’s not what markets are pricing, however. And when I write “markets”, I mean all of them. Equities included. Even crypto.

In fact, there’s already much about 2022 repeating that 2019 zeal, only ten times the intensity. As before, eventually, the public will ask, why? One day we’re told it is seventies-style inflation, then, bam, suddenly all about recession.

Emil is right in that Jay Powell (and his legion of sycophants) will try to write himself into the Volcker legend, even to the point of saying the Fed provoked this recession (if one does turn up soon enough) just to tame inflation as the long-ago former Chairman once did.

Markets have been moving toward that conclusion for over a year, ever since the PCE Deflator first erupted. There’s no mystery nor conspiracy; the only complication is to realize the money part was absent the whole time – which markets had shown from the very beginning.

Was that because the FOMC chickened out and only managed a single 25 bps hike?

The second of its rate hikes didn’t hit until the start of May, so we couldn’t even account for the second month of price deceleration by actual policy action.

Like when the first set of confused observers had to append “sentiment” to “trade wars” back in 2018 and 2019, the desperate “policy error” group will repeat the folly. They’ll say the actual rate hikes didn’t make the difference – because obviously they didn’t.

Rather, the end of “inflation” was due to rate hike sentiment. The Fed talking up taper last year, forward guidance (that silly concept) altered to prepare the economy for upcoming aggressive hawkishness. A bunch of deliberate communications from 2021 that they’ll tell you turned the tide before the actual rate hikes.

One and a half percent fed funds is less of a ridiculous explanation than this mush.