A Market Run by Press Conferences

By Gary Brode, Deep Knowledge Investing

We’ve noted two related market trends over the past few months.  The first is bad economic news is good for the market.  That’s because the Fed is more likely to slow rate hikes into a weaker economy.  Click the link for a more detailed description.  The second is the market has been trading based on comments being made in public by Federal Reserve Governors.

Fed Talking in Public:

Yesterday, a Fed Governor made a feint towards talking tough on rates, but then indicated they would consider changes in inflation and economic conditions in determining the rate of future interest rate changes.  The market promptly had a big up day.  This is ridiculous.  First, of course the Fed considers inflation and economic data in making decisions.  We can’t imagine any reason why anyone would expect the Fed to make all their decisions for the year on Jan 1 and then go on vacation.

Second, the Fed Governors are a group of people who have never held jobs outside of government or academia.  None of them have ever run a business. They haven’t had to make payroll.  (Insert the old joke about unmarried marriage counselors here.)  There’s no evidence they’re good at setting the most important price in finance; the cost of interest (which is really the cost of risk and of time).  The Fed has a long-term history of blowing up asset bubbles, and then crashing the economy when it all turns bad.  Even Chairman Powell has acknowledged that they were late and slow in raising rates this year.

Right now, we have the entire market manipulated by a small number of officials in a room followed by market increases and declines based on a series of occasionally cryptic public comments.  This is the kind of system we’d expect from communist China or the former Soviet Union.  The market is much more capable of setting the price of interest and it did so for nearly a century and a half at the birth of the United States.  The market does not need a Federal Reserve and it was created to give a limited number of people outsized influence over the money supply.

Today, Chairman Powell spoke in public and was very clear that we should expect continued rate hikes.  As we’ve pointed out previously, he can handle an increase in unemployment and a decline in GDP, but continued high inflation would crush his reputation.  Expectations for another big 75bp increase in the fed funds rate have gone from around 50% to almost 100% in the past week.