Powell could have just hiked in December and said "since the last time I addressed you, we have seen some signs of decelerating growth and a marked decline in short term inflationary pressures. As such, we are going to be much more flexible with our original plans to hike rates next year and unwind the balance sheet."
In today's discussion with Yellen and Bernanke, Powell has now changed his stance by saying more or less what I said he should have said back in December. He says now he's listening to the message of the markets and that the Fed will be flexible. That's a much needed first step in the right direction. However in my opinion, the Fed and market watchers in general are still too complacent in the face of what is clear evidence of a slowdown. They believe that despite the stock market dropping 20%, the slowdown in China and strong signals from the bond market indicating that rates are too high, the US will do just fine in 2019. Having a complacent Fed is not a good thing. Back in mid 2007 when problems first started to surface in the US mortgage market with subprime, Bernanke's response was that this was a small part of the mortgage market which will be contained. We all know how that story played out.
What a change in attitude we're seeing now compared to what we saw from 2009-2012 when the Fed was super accommodating and alert to danger. Any hint of a problem and the Fed was all over it while market watchers/pundits were always quick to call the end of the bull market.
Despite the strong jobs report today, which is a lagging indicator, we still have negative signals from forward looking indicators especially the bond market along with an ongoing global slowdown which appears to be picking up steam. It's great that the Fed changed its stance and moved towards flexibility which they were painfully slow in doing, but it would appear that they already made the mistake of tightening too much. The Fed went from "we are going to tighten 3 times in 2019" to "we might take our time before tightening any further". The message of the bond market is "you will be cutting rates before you raise them" which shows that the fed is still well behind the curve. History suggests you listen to the bond markets and not the Fed. History suggests that being long term bullish when the 2 year bond yield is at or below the Fed Funds rate is not the right posture to have, 3rd year of the presidential cycle or not. How can anyone truly put faith into such nonsense? I'm shocked to see how so many so called "professional" money managers have been mentioning this.
We will see how this ends up playing out. I've been around long enough to know that bear markets have violent rallies which can last anywhere from a day to a few months to destroy bears that have piled in and to clear oversold conditions while luring in sidelined money afraid of missing the bottom. Such rallies are usually sparked by hope, in this case hope that the strong jobs report and this change in the Fed's posture is going to somehow negate the negatives we've been seeing and lead to better times. Pretty weak reason for hope if you ask me. Bull markets climb a wall worry, bear markets decline on a slope of hope.
No comments:
Post a Comment