Monday, July 10, 2017

Fed is Late Again

They did it again.  Same mistakes, different time.  The Fed has set a pattern for their monetary policy which is:  they react to economic weakness quickly and react to economic strength slowly.  They will cut rates in 50 bps chunks at every meeting, and even between meetings, because they can't wait a few weeks.  You ever see the Fed raise rates between meetings?  For interest rates, it is  the staircase up, elevator down.

Starting with the Greenspan years, you had the 2004-2006 rate hiking cycle, in 25 bps increments, as the housing bubble was getting bigger and bigger.  They started too late and went too slowly.  Now the Bernanke/Yellen years.  Stretching out tapering over a year.  And that was with a 3 month delay because they hinted at it during May/June 2013 and should have done it in September but didn't do it till December.  Did they ever start QE gradually and build it up to full size in one year?  No, it was huge from the start.

And you wonder why the bond market doesn't believe the Fed when they predict 1 more rate hike this year and 3 more rate hikes in 2018.  Because the Fed overreacts to market weakness, and will either stall their rate hiking campaign or go to cutting again if we get a correction.  And odds are high that we will get a correction.  Don't believe the Fed when they say they are worried about high equity prices.  They will change their tune as soon as the S&P drops 10% and start worrying about stock prices getting too low.  They are Tony Larussa (retired micromanaging baseball manager) on steroids.
It has been a painfully slow rate hike cycle, and the Fed has lost their credibility when it comes to controlling asset bubbles.  They have babied the markets for so long, there is a expectation built in for  them to come to the rescue on any big dips.  And they will again.  Just like they did by delaying rate hikes in 2015 and 2016.  Now they have suddenly gotten brave with their 25 bps hikes every 3 months as the S&P has only gone up.

The financial pundits really do have a short memory.  They suddenly fear the Fed and their tightening cycle hurting stocks when they should be more afraid that the market is just a big fat bubble whether rates are at 0 or 3%.  

It looks like another boring summer day.  "Goldilocks" nonfarm payrolls number got traders positive again on stocks.  That shouldn't last for long.  Expect a move down this week to take back those Friday gains.  Chop continues.

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