Federal Reserve – Page 13 – The Contrarian Investor Podcast

What to Make of the Latest Hope of a Fed Pivot

Published October 24, 2022

The following is an amended version of the Oct. 24 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

Stocks had another big rally on Friday to conclude their best week since June and first three-week winning streak of the year. Major US indexes were all up multiple percent on the day. The apparent catalyst was a Wall Street Journal story that the Fed officials are “signaling greater unease with big rate hikes.”

Fed pivot injection meme — Source: Author via IMGflip

The Fed appears to have coordinated this latest injection of hopeium. San Francisco Fed President Mary Daly had the most succinct comments on Friday, saying “the time is now to start planning for stepping down.” The talk is that there will be another 75bps rate hike at the Fed’s next meeting and then 50bps in December.

Markets have taken all this as a clear sign that the Fed is indeed going to blink and back off of raising rates aggressively for much longer. There may be good reason to suspect the Fed will indeed go this route as there are indications that things are starting to break in the global economy. The UK is the main illustration for this.

The market may very well be correct in this assessment this time, but we’ve seen this movie before. The fact remains that with inflation high it is going to be very difficult for the Fed to justify moving to a neutral interest rate policy. When things do break it will very likely get ugly. It always does. That will bring inflation down for sure — along with create a bunch of other effects we haven’t begun to see in the US yet.

So yeah, Fed officials may be getting scared of the monster they have created (which interestingly was done to fight another, earlier monster of the same Fed’s creation). Doesn’t mean they’ll be able to do anything. Talk is cheap. We’ll see at the Fed meeting next week whether this goes anywhere. In the meantime we’ll get a fresh inflation reading on Friday with the PCE deflator.

The Fed’s Inflation Battle Is Doomed to Fail: Fabian Wintersberger (Szn 4, Ep. 28)

Published October 12, 2022

Fabian Wintersberger joins the podcast to discuss his views on the economy, inflation, and Fed policy.

Content Highlights

The Fed will not succeed at bringing inflation down to 2%. There will be no soft-landing for the economy (2:48);
Interest rate hikes will proceed until something breaks in the real economy, forcing the Fed to reverse course (5:04);
Bond yields: We haven’t seen the highs yet (8:16);
Background on the guest (14:10);
The situation in Europe. Central banks have no choice but to follow the Fed higher (16:38);
The situation in Wintersberger’s native Austria, which faces an unprecedented winter with dramatically higher energy costs (18:55);
Austria has historical ties to Russia, including in its banking sector, where one institution still has business in the country… (23:27).

More About Fabian Wintersberger

Twitter: @f_wintersberger;
Substack: The Weekly Wintersberger.

Quick Highlight Clip From Our YouTube Channel

Collision Course: US Economy and the Fed Wrecking Ball

Published October 7, 2022

A short synopsis of the Fed’s determination to ‘break things’

The following is an amended version of the Oct. 7 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

Non-farm payrolls this morning came in at 263,000, ahead of economist forecasts of 250,000. The unemployment rate dropped to 3.5% (it was expected to hold at 3.7%). The headline number was a decrease from the 315,000 figure seen last month and constitutes the lowest reading of the year. That was little consolation for investors who took the opportunity to sell stocks again.

Here the formula was the same it’s been: investors were rooting for a soft number signifying a slowing labor market, simply because it would bring more hope of a quicker Fed pivot away from interest rate hikes.

‘Breaking Things’

The NFP report demonstrates that in the US economy at least, nothing really appears broken. Consumers have been able to afford the higher prices for goods and services — mainly because they’re still employed and even still getting raises. That’s a problem because Fed officials are on record stating they are determined to tame inflation even if it means ‘breaking something’ in the economy.

Of course, talk is cheap. Each time investors bid up stocks they have essentially been calculating that if there is a real pain point in the economy, the Fed will probably see it as reason enough to pivot and flood the market with liquidity again.

Miley Cyrus 'Wrecking Ball' feat Jerome Powell. Meme by author — Meme by author via IMGflip.com

Perhaps this calculation will even be right. But the ‘pain point,’ wherever it ends up occurring, is likely to cause a blast radius with second- and third-order effects. The damage will likely be widespread, perhaps even in areas none of us can envision right now. Unwinds of this magnitude are very rarely painless.

Remember too that it takes up to a year for Fed rate hikes to work their way through the economy. This tightening cycle started in March. That puts us seven months in. Potentially still months away from when things even start breaking.

That all makes for a guarded market. Sure, there’s a chance investors could throw caution to the wind and bid up assets into year-end. But with all this uncertainty still out there, it’s difficult to make the case for taking risks. Markets hate uncertainty more than they hate bad news.

For what it’s worth, none of this is investment advice. Do your own research, make your own decisions.

Tag: Federal Reserve