Is the Fed trying to blow another, more hidden asset bubble?
The asset bubble that nearly ended in the first quarter of 2020 was rescued by two major saviours:
1) Unsustainable bearish (no, intimidating) sentiment, more so,
2) Central bank inflation led by the Fed.
From the moment the dovish Fed made its first headlines about asset purchases and rate cuts, the resulting bubble legs were in the bag.
This latest phase of the asset bubble has been under pressure in 2022 as the stock market (which is considered to reflect “good” inflation) has trended lower throughout the year. Commodities and precious metals have also been hit recently after a spike in the Russia-Ukraine war, which fueled Fed inflation (as in Q1-Q2 2020 manufacturing) after the impact of pandemic-related inflation on commodity prices had already intensified. ) supply chain issues.
The top of the chart above is a scenario where the Fed may not want to see an eventual bear market. The mid-trend for the broader U.S. stock market has turned down so far, but the main trend remains up. James Bullard is the only FOMC member to advocate for a 0.5% hike in the funds rate this week after a statement in February. The rest of the? They are by no means hawks.
but why? Why did the Fed exit with a meager 0.25% when it literally called for a more hawkish hawkish stance?
This usually leads to a slow Fed that finally kicks in and starts raising rates. But Treasury bills called for immediate action. Ben ‘ZIRP Eternity’ Bernanke gave way to Janet Yellen, who finally ended the “zero rate policy” in 2015 when Treasury yields rose.
The Fed is likely to be watching important economic indicators (unlike the worrying and backward-looking inflation data provided by the media each week) – such as the state of credit spreads rising as described in this article. Or maybe they saw the instability of the copper-to-gold ratio mentioned in this article.
Or maybe they see massive and growing U.S. debt, as the always-interesting debt clock (wow, that’s just numbers…what are those zeros at the end?) brought to you, Powell Reluctant to let it relax, however, under his watch.
So this week’s continuum identified the lower end of our target.
Where are we going from here?
Referring to the continuum graph above, we are either fully positive von Mises (i.e. inflation/stagflation/inflation hell) or reversed at the limiter (our goal has been those very limiters since inflation started in 2020) , which has fallen to the 2.5% to 2.7% region.
In my opinion, the Fed definitely does not want more stagflation to erupt, but is also worried about reversals and liquidations (Fed in a box?). By staying dovish (relative to the indicator in the first chart above), the Fed has the potential to take von Mises as a commodity and resource (this time including, if not led by it, and) by a paltry 0.25% sell off. . But for now, their bigger concern appears to be the impact on the debt pileup and the next deflationary scare, followed by a bear market in the stock market.