Stock market action curious before Fed Reserve afternoon move

As I wrote Tuesday I believe the Fed will raise the Fed Fund Rate this afternoon to 2.5%.

However my spidey senses were piqued yesterday afternoon when the Dow soared more than 180 points around 3:30 pm on little or no news. The futures market this morning are pointing to a 220 point positive opening.

Is this just the market reacting to backed-in news? Or was there a rumor that since the Fed chief Jay Powell has taken all of  the wind from the stock asset bubble, the central bank will stand pat this afternoon?

It would take a lot of jawboning in the press conference afterward to calm a very surprised market not to sell off in panic wondering what the Fed knows that led them to not raise rates.

Of course the narrative would also say that Powell was trying to placate President Trump and his constant badgering of why the Fed can’t just step aside and see where the economy is 6 months from now before hiking again.

We’ll know the answer at 2:15 pm EST, but see where markets go this morning to see if they tip their hand.

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Trump has every right to be Fed up with Powell

As the Federal Reserve begins its two-day meeting Tuesday, to presumably raise rates to 2.5%, President Trump is out there battling the central bank on its direction and policy.

Trump tweeted Monday:

It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!

Trump is correct in his brief economic assessment on global growth, where America’s say 2.5% rise in GDP looks a lot better than Europe or China. As well as the lack of any meaningful domestic inflation.
The Fed’s concern earlier this year was asset bubbles leading to inflation. What does that mean in layman’s terms: Americans were starting to do well in the stock market and their paychecks with the tax cuts after a decade of economic malaise were bringing them a sense of pride and contentment.
Well we can’t have that, the Fed seem to say. And sure enough with four hikes this year in rates the Fed has wiped out all gains in stocks this year and then some.
So what is the end result for America because of the Fed’s policies?
The rate hikes have muted the economic benefits of the tax cuts, by taking away revenue growth to pay for the tax cuts. Tax revenue is up slightly this year over the last couple, but if the Fed was not slamming on the brakes, then the economy would be moving ahead at closer to 4% GDP.
This tax revenue growth could allow the federal government to actual pay for the runaway entitlement programs and actually be able to cut budget deficit growth.
I don’t anticipate the Fed pausing and not raising rates at Wednesday’s meeting since it was telegraphed to the market for the last three months. Yes, the market would spike if they did pause, but then start asking itself what does the Fed know and probably sell of again.
I do agree with the President on the need for Fed chief Jay Powell to “take the victory” and pause after this hike. Let’s see where the economy sits in June 2019. It takes six months before you get the full meaning of how your economic policies are working.
I’m assuming that’s all that is at work here, a disagreement on economics and not something broader.

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Can the Fed chair, please take a seat

Today at 2 pm The Federal Reserve will most likely announce a 0.25 bps move higher in Fed Funds rate taking it toward 0.75 bps.

I say most likely since it would only be the second rise in eight years, so I feel I want to couch that comment.

Nevertheless, the more important aspect comes a half-hour later, when Fed chief Janet Yellen holds her press conference.

Yellen’s comments on the incoming Trump administration will be what drive the bond and equity markets.

The Fed chair needs to tell markets the board’s  policy will take its keys off of the incoming Trump policy, not that it will assess that policy and then move in a counter-direction in order to keep the status quo.

I believe the Fed chief  and the board of governors need to take a back seat on monetary policy and get off of the TV. With the exception of the last two Fed chiefs — Ben Bernanke and Yellen — most Americans never knew who led the Federal Reserve.

Monetary leadership should come from the White House, not the Marriner S. Eccles Federal Reserve Board Building just off of the Great Mall. Unfortunately, this has not happen under the Obama Administration. Both Tim Geithner and Jack Lew — Obama’s two Treasury chiefs — had their photos on a milk carton because no one knew where they were and what they thought.

The question is how do you put these “genies” back in the bottle after they have been enjoying more celebrity status than the Treasury Secretary for the last eight years?

The bombastic Trump, when it comes to the Fed, could overwhelm the academics and eggheads at the central bank. We may get a taste of this on Twitter at 2:01 pm today from the President-elect on his reaction.

The Fed's Decemberist revolution

You have to wonder about Janet Yellen and the Federal Reserve governors. They voted 9-1 to hold rates at zero, but suggested December is on the table for a rate rise.

I’ll have what they’re having.

Let’s ticked off what’s wrong with their thought:

  • China just cut interest rates to combat slowing growth as it moves toward recessionary pricing pressure.
  • Europe’s central bank is promising further easing in December to pull out of a recession.
  • The December meeting is on the 15th and 16th of the month. How many bond trading desks will be staffed leading into the holiday? What does that mean? A liquidity crunch not seen in seven years.

It’s all jawboning as a way for the markets to correct its exuberance. Stocks sold off, and then bounced because of the impossibility of the move. But its having the desired effect as strong dollar has futures market showing lower stock prices.

Bonds sold off with 10-year falling in price, due to uncertainty.

Yes the Fed did take out the language about monitoring conditions overseas, because it sees such weakness in China, Europe, South America and other BRIC nations, that its narrative would never hold up if the wording was left in.

As an aside, why do you think China is ending its one-child policy? It sees that it will need to grow its consumer class as a means to grow. It’s not out of the goodness of their heart or love of family.

We get GDP at 8:30 this morning. It’s the first look at Q3 after the Q2’s 3.9% print, which showed huge inventory build.

I believe it will come in at 1.1% to perhaps 1.4%, which is a marked slowdown.

Yellen's Sept. rate rise, not working for US

The July payroll number of 215K does not move the needle any closer to a Sept. rate hike by the Fed.

Despite Fed chief Janet Yellen’s desire to raise rates, if you take Bank of England chief Mark Carney’s words earlier this week — when he kept rates at the same low level because of deflation fears on falling commodity prices and a slowing of hiring and wage growth — the US economy cannot sustain a change in interest rates independent of the jobs numbers.

Could the Fed raise rates by 0.1% in a more symbolic rather than monetary move? Yes, but it can’t move again until 2016. The December meeting is off the table for an additional rise because of the calendar. End of year window dressing for stocks and lack of liquidity could be ruinous for the markets.

Gray’s Economy stands pat in its prediction from January that 2015 will come and go without seeing a normalization in interest rates.

Besides the way equities are behaving recently, by the end of August the Dow could be in correction mode, losing 10% of its value from the May highs.