Fantasy Land at the Fed

There is lot of projections that the Fed spews out, the most egregious and error-prone, being the dot plots for interest rates.  These Fed officials must have used a time warp, going back to the 1990s when the neutral Fed funds rate was at 6%.  They still fantasize about a neutral Fed funds rate above 3%.  Conveniently ignoring the 2% GDP growth rate and the heavy debt burden this global economy is running on.

It is funny that they can't even fathom the thought of consecutive 25 bp hikes at Fed meetings, especially since one of them would not have those "informative" press conferences, but they have the audacity to state that the Fed should reach a Fed Funds rate of 3.5% in a couple of years!

Then when it comes time to actually follow through on their projections, they chicken out with any excuse they could find, such as China in September 2015, the strong dollar and falling oil in March 2016.  Only after the S&P just keeps grinding higher, and the dollar grinds lower do they finally back up their fantasy land projections (at least for a few meetings), and put in rate hikes.

Ok, enough of the ranting, now time for how to play this upcoming Fed meeting.  I expect the S&P to be a snoozer, as it is about as boring as a market can be.  But for the bond market, it is a bit more interesting.  You have seen bond yields bounce back up strongly after bottoming a couple of weeks ago on hurricane and nuclear war fears.  Now that investors have regained their senses, they realized that they pushed rates too low, and we are getting the payback over the last several days.  At 2.23% 10 year yields, as I write, it is still in the middle of the 2.00% to 2.40% range that we seem to be stuck in at the moment.  With my expectations of the stock market to continue to be strong, I don't see how rates can break below 2.00%.  At the same time, there is just too much investor demand at higher rates for the 10 year to get much above 2.4% without seeing dip buyers charge in.

I do expect the Fed to talk tough, now that the S&P is at an all time high, and with rates well within their comfort zone.  Balance sheet runoff will be slow, and probably they won't be able to keep it going for as long as they say, because as soon as the market has a correction, they will stop dead in their tracks.  Guaranteed.  Think we could get more weakness in bonds over the coming weeks, and probably more of a grind higher in equities.