The Powell Pig

Even though Fed Chair Jerome Powell said, “Inflation has shown a lack of further progress... and gaining confidence to cut will take longer than thought," the Fed wimped out exactly as The Daily Doom was predicting:

1. It acknowledged it was not longer making headway on inflation and even changed its official statement to say so, which should mean that it needs to raise rates a notch to get things moving again, but …

2. Powell said that a rate hike was unlikely. As said here, while the Fed would need to do a rate hike, it would lack the courage to do so. It answered that question, though, because it knows people are thinking it should as that is now becoming obvious.

3. What the Fed also did NOT do, as I wrote in contradiction to another writer, was indicate any path forward that would cut rates anytime soon. In fact, Powell stated rates clearly need to remain high for even longer.

So, as The Daily Doom said months back, the Fed would need to raise rates a notch but would lack the courage to do so.

What really stood out, though, was how the Fed capitulated to the needs of the Treasury. It couldn’t have been more obvious! They had indicated from their previous meeting and by the mouths of various Fed officials, they might slow their Treasury roll-off (the main part of their QT, intended to unwind their former QE) to $30-billion per month. Instead, they decided to take an even bigger leap and stopped down to $25-billion a month.

In case you didn’t read my article about the real reason the Fed would likely take this leap on the path that risks future hyperinflation, you can find it here: “The Federal Reserve Is About to Go Full Banana Republic.” The gist of that article was that it appeared the Fed and Treasury had been talking and that the Treasury was looking for Fed assistance in managing its cumbersome debt, so the Fed would begin the QT that it claimed was purely for managing money and finance; but the real reason would be that the government can no longer afford the rising interest on the ballooning debt from Bidenomics as the Fed fights inflation. The Fed, I said, looked like it was about to choose helping the government over fighting inflation.

The fact that the Fed just did an even bigger leap right after having that apparent conversation with the Treasury underscores the real reason the Fed is now going to do exactly the opposite of what its financial obligations under law dictate because it put that change in QT policy on steroids. The fact that the Fed did a bigger roll back at a time when it actually and clearly needs to take stronger action against inflation, not less, should be enough to cue people in to how the Fed is now carrying the government debt indefinitely (in that the Congressional Budget Office has said these high deficits are going to continue as far as the eye can see). Credit-rating agencies have also said the debt will snowball out of control under current government policy. Yet, there is an even clearer evidence of what this decision was really all about, which you can be sure all financial writers, except the fringe few like me, will miss:

Yellen practically yells out the reason

The US Treasury simultaneously announced that it will not be issuing larger auctions of debt as it had earlier said it would be doing because it would not need to now that the Fed was helping it. That was put on Yahoo! as follows:

The US Treasury left its quarterly issuance of longer-term debt unchanged on Wednesday, with the government set to benefit from an expected slowdown in the Federal Reserve’s shrinking holdings of Treasuries.

So, there you have it: the Fed decided to give less intensity to its fight against inflation in order to make the Treasury’s job a lot easier right when everyone can see the Fed needs to fight harder. I’ve said all along that the Fed’s QT would create a crisis, coming as it was right at time that expansion of government debt issuance was mushrooming. That, of course, is why the Fed also lacks the courage to raise interest rates as it knows it should. Powell was pretty sheepish about why the are not raising interest. It’s simple, but he would never spell it out: No Fed increase in interest rates comes about without a raise in Treasury interest, which the government can no longer manage.

Corner painted, and the Fed is in it with the US Treasury.

The Treasury Department said in a statement it will sell $125 billion of longer-term securities next week at its so-called quarterly refunding auctions…. That’s after boosting them the three previous quarters, taking some auction sizes to record levels.

It had said it would be boosting them again, but those record auctions were showing signs of trouble. No need to now. Thank you, J-Pow.

Officials said they don’t anticipate having to increase sales of regular notes and bonds “for at least the next several quarters.” Pressure on the Treasury is expected to ease when the Fed slows its run-off of US government securities holdings….

The pressure was eased … by more pressure relief than they thought was going to happen … in order to make certain it accomplished the work the Biden Admin. needs to help its programs out during this election year!

The Treasury did some other fancy footwork to manage its cumbersome debt:

The Treasury also announced the start date for its first debt buyback program in more than two decades….

Against a backdrop of projections for the US budget deficit to stay high for years to come, officials asked the department’s advisory panel – made up of major market participants including BlackRock Inc. and JPMorgan Chase & Co. representatives – to come up with ways to minimize borrowing costs and expand the investor base….

That group, the Treasury Borrowing Advisory Committee, suggested the department consider new types of securities, such as callable bonds that can be redeemed ahead of the maturity date, green bonds, and new maturities for floating-rate and inflation-linked bonds.

They’re not a one-trick pony, but they are having to add new tricks to get the government through the present agility course.

One sign of the continuing strain on the Treasury came Monday, when it lifted its borrowing estimate for the current quarter.

Well, the Fed just took that load off their shoulders by promising to carry a larger part of the government’s debt for longer … longer than would be beneficial for ANY of the Fed’s financial objectives, as neither its stable-currency mandate or its strong labor mandate require it to make an even larger decrease in its QT rate than it had been talking about.

The situation is so bad under Bidenomics that even Yellen had to say…

she was concerned “where we’re going” with the deficit, and that “significant steps” would be needed to reduce it in time.

Let’s underscore “significant.” While it needs to happen “in time,” the time is long past due, and there is no plan to do it in this time, which is election time. In the meantime, the Fed made an even more significant step than it had planned to help shoulder the load for the government, inflation be damned!

The Treasury said the moves assure Treasury debt sales will remain steady for a long time; but Stephen Stanley, chief US economist at Santander US Capital Markets LLC., said, “I still see the next move being to larger sizes.”

We’re now in a debt doom loop, but the Democrats have no intention of reducing expenses, nor do Republicans have any willingness to raises taxes back up from the Trump Tax cuts that contributed their part to this deficit crash course. No one wants to raise taxes during an election year, so you don’t hear Dem’s pushing that very hard either.

Notably, Fed interest-rate cuts appear to have fallen completely off the table for this year, as also anticipated in The Daily Doom. We’ve reached that corner in the floor the Fed has been painting where it now has to weigh all its decisions between what it needs to do for monetary policy reasons and what it is pressed to do to save the government from its debt troubles.

One other little gimmick here is related to what I just said in the last paragraph. Note that, while Yellen’s Treasury, which should be your Treasury but isn’t, tried to make it sound like it was not inventing new tricks to manage the debt by noting it had done something very similar two decades ago. While it’s true that the Treasury did something similar, no one mentioned that the reason the Treasury tried debt buybacks two decades ago was that the government under Clinton and Gingrich, as feuding dancing partners, actually managed to run a surplus because one raised taxes while the other cut spending. Two decades ago, the Treasury was trying to figure out what to do with the surplus! That was a long, long road away from where we are.

I remember, when the Bush Tax Cuts were implemented, destroying that budget surplus, I exclaimed to my wife, “Well, we’ll never see another budget surplus or pay down on the national debt again in my lifetime!” While my lifetime isn’t over yet, we’re now so far away from what was achieved in the Clinton-Gingrich standoff that there is no possible way back to that in the years that remain for me.

The goal of the Treasury buyback trick back then was to figure out the best way to PAY OFF the debt without throwing the Treasury yield curve out of whack. It wasn’t to manage an existing problem with the debt; it was to pay the debt down without creating new problems. The government decided to expand its low-interest debt issuance in order raise money to buy back some of its highest interest debt and retire it. It was a move to change the balance of different types of debt as they paid off the most expensive debt.

Markets cavort

There was a notable pump-and-dump reaction to Powell’s words by stocks.

At first, stocks got juiced when Powell said that the QT dial-back would be bigger than anyone expected.

Then stocks dipped as Powell admitted,

"Inflation has shown a lack of further progress... and gaining confidence to cut will take longer than thought."

(Well, not longer than thought here on The Daily Doom, but longer than Powell thought when he announced “Mission almost accomplished” back in November and much longer than stock investors thought when they interpreted that to mean the Fed would soon be off to the race track with new stimulus because the inflation fight was clearly almost as good as in bag.)

Then stocks soared when Powell deftly assured his trading buddies that the talk of a rate hike was premature. There was little chance of that anytime soon. (Oh yeah? Wait until you see what happens when recent FOMC decisions allow inflation to run even hotter.) Then, as Zero Hedge put it,

CNBC's Steve Liesman asked the big question that everyone should be asking: you are 'sort of easing' by reducing QT while holding rates flat because you're not confident that inflation is under control - wassup with dat?

Powell replied with some words that meant nothing, stating that they have long planned on tapering QT and claimed that 'reduction in balance sheet run-off is not policy-easing'.

Well, it kinda is! It is easing off on the tightening at a time when they need to do more tightening, and it had the effect of lowering interest rates! If it looks like a pig and grunts like a pig, it’s probably a pig.

By the close, all of Powell's pig-kissing lipstick had been wiped off (see below for the coordinated crypto/nasdaq take-down) as stocks saw solid gains erased in the hour after Powell stopped speaking... Small Caps and The Dow managed to hold on to the gains but Nasdaq and S&P closed nearer the day's lows.… MAG7 stocks ended the day unchanged after giving back their post-Powell gains…. Treasury yields plunged 6-8bps across the curve on the day, with the short-end outperforming, dragging all yields lower on the week.… The 2Y Yield snapped back below 5.00% once again.…

 

 

So, financial conditions eased, even if not quantitatively. QT got easier, too, which is as Liesman said “sort of easing”— not quantitative easing, but financial easing all the same. Right as inflation is demanding tougher action, as Powell finally admitted it was getting worse, the Fed slightly eased financial markets in order to bail out the US Treasury! It certainly wasn’t for the sake of monetary policy. I mean, you know it is apparent when even the mainstream press wakes up enough to say, “You’re sort of easing” at a time when they admit inflation is headed in the direction of moving back out of control.

Prior to the announcement,

Latitude Investment Management’s Freddie Lait said he believed the current level of interest rates was “perfectly fine” to balance the inflation and growth outlook for the world’s largest economy.

In other words, no financial reason to justify this kind of change.

“From the way we have thought about it for the last 15 years, and I think for longer too, there is no economic rationale for cutting,” Lait told CNBC’s “Squawk Box Europe” on Wednesday.

“The reason they might cut is because the U.S. government can’t afford it — and that’s a much scarier reason to have to cut,” he added.

They didn’t cut interest rates, but same could be said about cutting QT. There is no economic rationale for that either, as it has the same effect. I am confident however, that most people in the press room fell back to sleep as Powell started smearing lipstick ALL OVER that pig.

The next question is what kind of chaos is all this double-speak going to cause as Powell threads the needle right up the pigs snout, in all the ways I said here you could expect:

1. Acknowledge inflation was going back up (therefore needing a rate hike).

2. Not dare to make the needed rate hike, but also not be able to offer any hint of rate cuts due to rising inflation.

3. Revise their QT in a way that will greatly aid the US government (only do it to an even greater degree than I thought they would, making the need and the objective all the more clear).

The financial press hit the snooze alarm, but sleeping is going to be rough from now on as the plan hatched is a chaotic jumble of pretending to still be fighting inflation while pretending not to be monetizing the government debt. The press is going to have take sedatives in order to keep from asking questions about all of that and rest as if all is under control because I don’t know how else you avoid seeing and questioning something so obvious. (So, invest in sedatives manufacturers, I guess because plenty will be needed to keep everyone in congress and the press asleep as to what the Fed just did.)

Powell also said he doesn’t see any hints of stagflation. Apparently, he already has is airplane sleeping mask on as he attempts to bring us down for that soft landing on the cracked and lava-oozing tarmac. This ride on the Weimar rollercoaster should be fun.

(There is, after all, plenty of evidence again in headlines of serious stagflation, just as there was in recent headlines … all of which I’ll be laying out in the weekend Deeper Dive for paying subscribers.)