The Fed Utters Words & Rates Shot Up; Narrative vs. Reality
Rates moved higher today in response to some comments by the Fed about the need to fight inflation, and I thought… “Good Gravy! Again?”
Economist vs. Plumber (I Was the Plumber)
In the early 2000s, I was acquainted with a very prominent Fed official. We ran into each other often, and economics was often the topic at hand.
I was very concerned about the economy because I was a loan officer mired in the lending excesses of the early 2000s.
Some of the excesses included: (1) 100% financing for investors with 680 credit scores, with no income or asset verifications required; (2) Fannie Mae was buying subprime loans en masse and creating an artificial market for them; (3) inexperienced speculators were calling me daily to look for mortgage financing; and (4) cocaine-addled loan officers were driving around in $125,000 cars, convinced that they were business moguls (in case anyone is wondering, they weren’t). I was also concerned because I was reading column after column in Forbes magazine about the perils of cheap money, and the malinvestment it fostered.
I would share all of this with my acquaintance at the Fed, and he would literally pooh-pooh me and dismissively say that their data said there was no cause for concern.
Well, apparently there was a cause for concern.
It was the classic case of “plumber vs. economist.” I was the plumber in the streets, and my acquaintance was the economist in the ivory tower – missing reality.
It was very similar to the “Uneducated Economist ” (a lumber salesman) screaming about lumber prices going through the roof in 2021 when the Fed was telling us inflation was not a concern.
The Fed Has Never Ushered in a Soft Landing
The Fed is currently pushing a narrative of continued inflation, a strong economy, and the strong possibility of a soft landing (raising rates and stemming inflation without ushering in a recession).
But my question is, why do markets respond to the Fed’s narrative so strongly when the Fed is wrong so much?
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First and foremost, the Fed has never ushered in a “soft landing.” They came close in the mid-1990s, but even that was marginal – and there are no other examples.
So why anyone thinks this time is different is beyond me.
More importantly, the Fed has been insanely wrong over and over.
Fed Chair Alan Greenspan insisted that home prices were increasing in the early 2000s based on “fundamentals” and not based on loose money and ridiculous lending standards. He then left rates way too low for way too long.
Prior to that, Mr. Greenspan did much to foster the dot-com implosion in 2000 with excessively easy money in the 1990s.
In 2007, Fed Chair Bernanke told us the subprime crisis was largely contained. Not so much.
More recently, Fed Chair Powell insisted time and again that inflation was “transitory” (aka not an issue)… before prices rose 25%.
Every time the Fed swings and misses, the economy does poorly with popped bubbles, inflation, and/or recessions. And every time, the Fed ends up REACTING to the mess it both missed and helped foster.
The Fed Rarely Predicts Anything and Really Just Reacts
So, this is my 200th reminder that the Fed almost never anticipates correctly and always ends up reacting to the events at hand.
As economist Stephen Hanke often reminds us, whatever happens over the next six months is already “baked in the cake,” and there is little the Fed can do about it.
Rates moved up today in response to the Fed’s comments, but they will move back to wherever they are supposed to be based on economic fundamentals (inflation and growth expectations) shortly.