Captain Powell Tries To ‘Communicate’
Well, that was one for the record books. As Zero Hedge so colorfully described it, the last 90 minutes on the stock market yesterday brought the worst plunge on a Fed day in recorded history!
After Powell’s exquisite rugpull, where the most dovish Fed statement in almost one year was followed by the most brutally hawkish press conference where the Fed chair basically told markets to eat shit and die when he said that interest rates could go higher than previously projected, leading to the worst final 90 minutes of trading on a Fed day in history.
In this case, the stock market’s end of the day hissy fit was especially telling. To wit, traders had just seized upon new language in the Fed statement that referenced the lagged impact of monetary tightening. Apparently, this was interpreted as code for “pause” and in a nanosecond the stock indices were ripping higher:
…..the committee will “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Alas, Jay Powell was standing at the ready with a supersized bucket of cold water. No sooner were stock prices high in the green clover than these words came tumbling across the tube:
“It is very premature to be thinking about pausing. People when they hear ‘lags’ think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go,” he said.
Well, these broken markets put you in mind of Paul Newman, who was also sent tumbling into the dirt by The Captain (warden) in that famous scene in Cool Hand Luke. As the latter thus explained his action:
“What we’ve got here is failure to communicate. Some men you just can’t reach. So you get what we had here last week, which is the way he wants it. . . “
That is surely the case with today’s liquidity-addicted markets, which apparently insist on being punished again and again. After all, prior to yesterday there had already been three aborted breakouts this year on the basis of increasingly diluted versions of the “pivot”.
Thus, last March stocks (blue line) ripped higher on Pivot hopes that rate cutting would start by year-end, even though the expected “terminal” Fed funds rate at that point was just 2.00%.
That is to say, CPI inflation was already 7.9% Y/Y, but the robo-machines and day-traders were persuaded that the Fed would soon re-open the liquidity spigot 600 basis points lower. Talk about delusional spoiled brats.
Of course, then came the big summer Pivot rally, when the expected terminal rate was still just 3.5% and the CPI had already hit 9.0% (June Y/Y). Again, the markets were either immensely dense or unaccountably expecting an overnight collapse of inflation back toward the Fed’s 2.00% target.
Next came the mid-October “pause” rally on the heels of an 8.2% CPI report for September. At that point, the expected terminal” rate had risen to 4.4%, but it was still a case of same song, different verse.
Inflation had by now proved to be stubbornly embedded, but the infinitely coddled gamblers of Wall Street insisted yet again that a deeply negative real Fed funds rate would somehow be sufficient to bring inflation to heel.
Needless to say, Powell is no Volcker, as we will remind once again below. But we are beginning to think that he might at least resemble The Captain. He is trying to communicate with these people, but apparently they just don’t want to be reached.
Still, you’d think today’s report that unit labor costs continued to soar during Q3 might bring at least a semblance of sobriety down in the canyons of Wall Street. The Y/Y gain of 6.1%was down a tad from Q2’s shocker ( 7.9%), but the impl
Article from LewRockwell