The Fed announced Wednesday that it would double its rate of taper, which means that by the end of March it will not longer be overtly dumping money into the banking system. It also implied, via its idiotic dot-plot, that there would be three interest hikes in 2022. Initially the stock market rallied hard on this news. But it was technical fool’s gold. The Nasdaq bounced up from its 100 dma while the SPX bounced up from its 21 dma and the Dow from its 50 dma. This triggered a manic short-cover rally (the index of most shorted stocks outperformed everything).
I expected a follow-through on Thursday for at least the first half of the day. Instead, the market gap’d up at the open and began selling off quickly seven minutes after the open. The Nasdaq plunged 385 points and closed on its lows. The financials had a knee-jerk reaction to the Fed’s threat of raising interest rates in 2022 and soared early on Thursday. On Friday the financials got absolutely pounded, falling below their close on Wednesday.
The intra-day volatility engulfing the market is a reflection of growing market instability. This is not surprising given that valuations by most metrics are considerably higher than at any point historically. Upon further review, the FOMC policy statement is widely acknowledged to be a sheep in wolf’s clothing. The revised policy implemented by the Fed will continue money printing and balance sheet expansion at least through March. In addition, if we assume the Fed follows through and hikes rates three times in 2022, real interest rates will still be negative. This is not how to attack inflation.
When Paul Volcker assumed the Fed Chair in 1979, the inflation problem he faced is similar to the current inflation problem (rampant money printing and increasing scarcity of energy). The money supply had tripled between 1971 and 1981. He immediately jacked up the Fed funds rate by 2% in 1979 – and a single rate hike amount that was unprecedented. The FFR was already above 9% when he started. By the time he was done hiking the effective funds rate in 1981 was over 20%. That’s “hawkish” Fed policy dedicated to dousing inflation.
The Mises Institute’s Ryan McMakin wrote a must-read commentary about propaganda vs reality with regard to the Fed’s latest monetary policy statement:
If you did any Fed watching this week, you probably heard all about how Jay Powell has turned (or perhaps returned) to hawkishness, and how the Federal Open Market Committee is all about fighting price inflation now.
A particularly cartoonish version of this claim was written by Rex Nutting at MarketWatch, who declared, “Everyone’s a hawk now. There are no doves at the Fed anymore.” He wrapped up with “This means that inflation no longer gets the benefit of the doubt. It’s been proven guilty, and even the doves will prosecute the war until victory is won. For the inflation doves at the Fed, Nov. 10, 2021, was bit of [sic] like Dec. 7, 1941: Time to go to war.”
This reads like a parody, so I’m still not 100 percent convinced this writer isn’t being sarcastic. But one will find no shortage of articles making similar claims throughout the financial media—albeit in a less over-the-top fashion.
The rest of the commentary is here: The Fed Is Hawkish Now? I’ll Believe It When I See It.