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If I am The Fed Chief, These Markets are Freaking Me Out

CAMS Weekly View from the Corner - Week ending 3/8/24

March 11, 2024

On a personal note today’s subject arrived in a moment of involuntary self-speak if you will whereby I felt, after reviewing the markets’ landscape, that I think I would be freaking out if I were the Fed chief. 


Below we go with an approach meant as a contemplative self-discussion as though I am the sitting Fed chief while I question his views as if they were my own


I question the assessments, in particular the forward looking assessments in light of some market participant behaviors of late.  It is the market participant’s behaviors that is central to the questioning, not my opinions.


So here goes some of my inner dialogue as I review the general market landscape and do some inner questioning as Fed chief.  (As an FYI this is longer than normal – lots to contemplate and rethink when you are Fed chief.)


Am I missing something? 


I have been seeing and verbally sharing that while we still have higher than desired levels of price inflation much progress has been made.  With this, I have believed and have been sharing that we are most likely done with interest rate hikes in light of the view that said price inflation progress will continue.   


I have also been adding with each passing month that rate cuts are not imminent but also have been adding that rate cuts are getting closer


Knowing the function of market participants (always forward looking) is this analogous to disciplining my dog while simultaneously handing him a bone?  Will my disciplinary message really get through to him as he enjoys his bone?


Should I be doing this knowing the position I hold, and with this, the incredible weight any words I speak carry within the socioeconomic/market(s) landscape? 


Market participants the globe over dissect my every word and then project forward from there.  I cannot forget all markets are discounting mechanisms (think price assets today according to what they see downstream) and my words play a role in that discounting process. 


Various markets and market relationships are telling me that market participants have been loosening financial conditions in recent months which effectively act as though rate cuts have already begun.  This while I keep speaking from the rearview mirror perspective in how much I have tightened financial conditions with past rate hikes.  My message is out of sync with what has transpired with general financial conditions of late. 


And not only various market participants but my banking system too has jumped in on the loosening of conditions process.


I see the net percentage of my banks which had been tightening lending standards with my prior interest rate raising actions are now moving in the opposite direction in recent months.  While I am not pulling the trigger on interest rate cuts am I being too loose with my words realizing I still do have a price inflation issue on my plate? 


My attempt at tough talk while simultaneously handing out bones may be a self-induced problem that shows itself downstream.


I must realize that I speak from the past a lot always offering how we raised interest rates - emphasis on past tense.  This while participants are projecting forward and loosening financial conditions in the now, as well as in recent months, with no let up in sight looking forward.  Is this going to work out?  Can I put this price inflation era to final rest with this strange framework unfolding as it is?


On top of this general storyline markets have been trending generally upward and in some cases are beginning to look like rocket rides.  Two of those in particular are beginning to freak me out. 


Why are they doing what they are doing as they are focused on their forward looking view while I continue to express confidence that we have this price inflation thing all but whipped as our forward looking view?  We are not lining up – why?


Am I too focused on the near-term and my 2% price inflation objective as though if we reach it everything is guaranteed all good again? 


If so are they focused on a bit longer horizon and with this see that with my near-term focus, if not obsession, that I will begin cutting interest rates too soon?  With this then, given some time, are they concerned the end result will be the price inflation genie once again will be let out of the bottle?    


Bitcoin and Gold


The crypto currency bitcoin has gone mad to the upside again.  It was dormant and uninteresting while we were actively raising rates coupled with my strong price inflation fighting language over the previous couple of years. 


Suddenly it has chimed in on the loosening financial conditions and has gone straight up in price again.  Through this lens it is as though we had never embarked on an interest rate raising campaign.  So strange.


I know this crypto has an inherent scarcity factor to it unlike my Federal Reserve Notes (the dollars in your pocket) and through this can be a call-out on our Fed policies - but practically observing - it behaves far more as a barometer of speculation.  Wait, speculation taking hold, what!?


It is that speculative aspect that is beginning to freak me out as well.  If I have financial conditions necessarily tight to put an end to this price inflation era why in the heck do I have a bellwether speculative market such as crypto going crazy on me to the upside?  What are they seeing – and what am I missing? 


Then there is gold – always our nemesis at the Fed.  They are usually the first to expose our policies when we get too easy with the money spigots.


It is so hard to discredit it being it has been a mainstay in the socioeconomic landscape, the globe over, for 5000 years.  I know in this case it is not a mainstay speculative vehicle but rather its participants are squarely focused on its inherent scarcity and the role it has played as money and a store of value over millennia.


My Fed predecessors started this 21st century with our Federal Reserve Notes being valued at 1/250th of an ounce of gold.  Through their historic easy money policies in the last couple of decades gold participants devalued our Fed Notes all the way to 1/2000th of an ounce. 


To think that we went from 250 of our Fed Notes to buy an ounce that in-turn went all the way to 2000 is hard to fathom. 


Unreal, but my predecessors had to do it - or did they?  I guess I did it too as the Fed Note devaluation relative to gold has taken place on my watch also.  Well, can’t change the past….anyhow. 


But wait, why is this happening yet again as I sit here and think? 


What are these market participants seeing and why is their messaging getting radically different from mine right now?  Does it simply go back to they believe I will be cutting interest rates far too early?  Does the Fed that I lead truly have a credibility issue with participants that I am unwilling to acknowledge? 


Man o man, that’s not good.  I am the steward of a fiat currency – backed by nothing but collective confidence in it.  If my Fed has a credibility issue that means there is a confidence issue and that feedback loops to its value which takes me right back to the downstream strength of its purchasing power.  There’s that price inflation topic again – can’t seem to get away from it.


Now I’m seeing, just in recent weeks, those participants tacked on another 200 of my Fed Notes to buy an ounce of gold which now has us devalued all the way to nearly 1/2200th of an ounce.  Their messaging is clear – they want nothing to do with my currency – again which is not good from a confidence perspective.


Unlike bitcoin currently, this gold market has now launched to new all time highs.  What!?  Why?  Why is this happening if what I am messaging with my forward looking view is accurate?


The gold market is screaming a fiscal and monetary message. 


I can’t do anything about the fiscal side as that is between Congress and the Administration.  This aside, the monetary policy messaging again has me seriously asking – what am I missing?  I have been convinced we are taking this price inflation era down to a landing and ready to park it for good and now I’m seeing this. 


The two markets together – bitcoin and gold have me befuddled.  Are they equally concerned about the fiscal side as they are my monetary side of our D.C. landscape?  Are both sides of our house – fiscal and monetary – losing their trust and confidence?  If so, that is not good and yet again, I can only impact one side of the issue.


No matter how I slice the two of them they both are inherently scarce monetary vehicles and are screaming that my Federal Reserve Notes will be worth----less downstream as they price their vehicles higher when quoted in my currency.  But wait, that means they see that downstream price inflation is not dead just as I have grown ever more confident in believing it will be. 


So many questions and so much to contemplate.  Perhaps I should rethink my messaging in light of the message emanating from various collective market participants?  We certainly are out of sync with our forward views and expectations. 


I Resign


And with this dear reader, I resign from my temporary Fed Chief role. 


Markets generally are sending various messages.  Bitcoin and gold are two that should not be ignored.  Their fires have been lit which does not fit with the “we got this” general message from the Fed and other D.C. leadership entities.


Coming months should prove interesting on many fronts within the socioeconomic landscape.  We will continue to share as we ourselves navigate markets and share our views and questions from our perch.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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