Notes From Underground: We Got Our Answer

In Sunday’s blog post I asked whether the tariffs trumped U.S. economic data. Well, we got our answer on Wednesday and it’s a resounding YES. Federal Reserve Chairman Jerome Powell’s press conference Wednesday suggested that he has been sucked into the vortex of President Trump’s media manipulation of the tariff narrative. CNBC’s Steve Likesman asked whether the interest rate cut was an insurance cut instead of a DATA cut. Powell cited these reasons for the Fed’s decision: To insure against global risks /trade tensions, which is unusual as there is not much history of monetary policy responding to economic consequences of trade friction; and the cover all of the world’s largest central banks, which is the need for a faster return to inflation.

In expounding on the global risks Powell noted that the global business cycle has been a bigger factor than anticipated seven months ago because of the deleterious effects of trade policy. Also, under the issue of global concerns Chair Powell bent further in the direction of President Trump by acknowledging that the efforts of other central banks easing or considering it served as rationale for the immediate cut and an end to the Fed’s BALANCE SHEET UNWIND two months ahead of schedule. That may have been the key surprise, although my progeny Alexandra Harris has been talking about it for weeks, and as recently as Tuesday on Bloomberg Radio.

The combination of the FED‘s two moves should’ve been considered VERY DOVISH, but something in Powell’s opening statement caused the market to reconsider. Powell said the 25 basis point cut was to be seen as a “MID-CYCLE ADJUSTMENT TO POLICY.” The market has struggled to parse the meaning of this and decided that it meant ONE AND DONE. The result was a drop in the SPOOS, GOLD, and commodities while the DOLLAR RALLIED and the YIELD CURVE FLATTENED since the FRONT end of the curves were sold off in the belief that the Fed is done. But I would take the other side of that argument from this perspective: The press conference was a DISASTER as the more Powell spoke the more confused he seemed to get. As did the markets.

I will posit this: The FED seems lost and with that its credibility is diminishing as it is caught between Trump’s tariffs and the WILL OF MARIO DRAGHI and the ECB. The two themes driving the FED are tariffs and containing the interest rate differential between the FED and, most significantly, the ECB. Jim Grant spoke about this in a CNBC interview Wednesday afternoon supporting this NOTES FROM UNDERGOUND’S LONG-ARGUED VIEW THAT U.S. MONETARY POLICY IS BEING MADE IN FRANKFURT.

As the FOMC statement said, “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the Federal Funds rate to 2 to 21/4 percent.” This is exactly what Vice Chair Richard Clarida laid out more than two months ago. Chairman Powell appeared lost in the press conference, which was very appropriate as he appears confused as FED policy has become unmoored from its beloved Phillips curve while taking on the role of the world’s central banker.

It didn’t take long for President Trump, the Fed’s chief adversary, to tweet about the FED‘s failure to do the correct thing in regards to the U.S. economy. Now, let’s pay attention to how the market begins to digest the concept of the central banks of the world losing credibility.

***Something else to watch: The Canadian 2/10 yield curve is inverted and approaching levels last seen in August 2007 when the curve made a low of -14 basis points. On Wednesday it traded at -4 basis points. This is important because the Bank of Canada has been one of the few developed market banks that has never hit the zero lower bound or embarked on a QE program.

The inversion may be a genuine reflection of a slowing economy with short rates too tight or it may be suffering from the fallout of the ECB and BOJ. Either way, it’s another indicator of rising concerns about all global debt markets.

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14 Responses to “Notes From Underground: We Got Our Answer”

  1. sproffer Says:

    Always good insights, Yra. I’m struck that the Fed signaled they will monetize US Treasury issuance by investing MBS principal in US Treasuries. Other than pinning the 10y in 1940s, I don’t recall a time when the Fed monetized federal debt outside of a crisis. As such, today’s FOMC announcement seems more about curbing (trying to reverse?) USD strength. Powell may be confused or Mr. Misunderstood. In any case, today’s cut may be the first blow to the dual-mandate.

    • yraharris Says:

      Sproffer– a very fine post .And today’s market response to Trump and Powell proves it out

  2. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Great call Yra.
    And the USD action in the wake of a Fed easing reinforces my view that it’s the ‘last man standing’ for it and US equities to attract such support merely due to the greater weakness elsewhere.
    In the words of the inimitable Jake Gittes (in ‘The Two Jakes’ sequel to ‘Chinatown’), they are “like the leper with the most fingers left.”
    But it all feels like it is gong to end badly as central banks push accommodation where politicians have no idea how to stimulate their economies (like deregulation and tax cuts.) They collectively feel like the Bernanke Fed in the face of the Obama administration and Congress’ serial business intimidation.
    It is surely going to be especially bad for Europe and Japan, and the soon to be Boris Brexit-barbecued UK.
    Looking forward to more-

  3. asherz Says:

    Notice the physical resemblance and confused responses between Chairman Powell (the seat of his pants aviator) and Robert Mueller, (purported author of an eponymous ghost written report ?)

  4. Richard Papp Says:

    At 5:30 AM EST on 1 Aug. I say let’s see what the Friday’s closes are and then re-evaluate over the weekend!

    • yraharris Says:

      Richard—right you are and the markets just got a push from the key source,Can’t even send Kudlow out to rewind it

  5. The Bigman Says:

    With apologies to Grace Slick:

    One cut makes you larger, and one cut makes you small
    And the ones that Jay Powell gives you, don’t do anything at all
    Go ask Christine, when she’s ten feet tall

    Response to Fed: Gold down, 10 year under 200 basis points, the yield curve is collapsing and USD soaring

    Welcome to Bizzaro-World

    Agree with Asherz’s observation on Powell’s appearance- Someone please give him some butterscotch pudding and put him to bed.

    A question for the Talmudic scholars: Is it moral to profit from the actions of others that will ultimately destroy the world economy and cause untold misery?

    • yraharris Says:

      The Bigman–to your quest for Talmudic knowledge in attempting to profit off the ills of the world—I don’t know the answer but am sure some readers will offer their wisdom .But I would find comfort in the words of Billy Joel—We didn’t start the fire

      • yraharris Says:

        And let me continue –there has been enough wisdo shared on the blog site that could have aided the policy makers –but due to my/our failure to be in with the Davos crowd —-what the heck could we possibly know.Also,as Kevin M. has pointed out many times–the elites were not discredited for the Great Financial Crisis but instead further rewarded by the Bernanke/Draghi efforts at the Portfolio Balance Channel Policy unleashed at Jackson Hole in August,2010

  6. The Bigman Says:

    Wow Trump must have been listening to Rick Santelli and Judy Shelton this AM Rick pointed out that financial repression and tariffs are lo mismo when it comes to debasing the currency and gaining trade advantage. Two hours later Trump annonces 10% tariffs on 300 billion of Chinese goods and crashing down comes the dollar and bond yields Take that Jay Powell Trump makes the Fed irrelevant in less than 140 characters. In Bizarro world Trump is the bond vigilante jajaja

  7. yraharris Says:

    To all concerned:The issue is global central bank credibility tas they seek ways to lift inflation expectations which was a BOOGEY MAN They created—-Trump didn’t need Judy Shelton bit it helped him gain the intellectual argument—as Michael said to Fredo—Trump says to Mnuchin—-“you are nothing to me now”–it was Mnuchin who has pimped for Powell and now game is on

  8. Don H Says:

    Well the/GC Buying machines stepped up again on another retest near the 1411 level this a.m. and a strong bid has us 12pts shy of the1470 target as I hit send.
    The Bullish assumption for another record high has been negated for awhile with the break below 2949.50 today. :-\

    • Don H Says:

      (08.05) /GC has finally traded the 1470 target this a.m. Still Bullish as long as Buyers hold mkt above 1455, on any pullback, target 1485. IF 1455 fails to hold bid, then anticipate deeper pullback.
      My .02

  9. Robert Zimmerman Says:

    The Talmudic says give what you can afford. Not to try and hurt others while benefiting yourself.

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