Powell Promises Patience: So What? It Doesn't Matter

At a speech in Atlanta, Fed chairman Jerome Powell promises patience and walked back his autopilot statement. So what?

No Preset Path

“As always, there is no preset path for policy,” Powell said. “And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”

Balance Sheet Reduction

The above statement is amusing given that Powell discussed a balance sheet autopilot following the December 19 FOMC meeting.

We thought carefully about how to normalize policy and came to the view that we would effectively have the balance sheet run off an automatic pilot and use monetary policy, rate policy to adjust to incoming data. I think that has been a good decision. I think that the runoff of the balance sheet has been smooth and has served its purpose and I don't see us changing that. And I do think that we will continue to use monetary policy, which is to say rate policy as the active tool of monetary policy.

Autopilot Off

Apparently, the autopilot is now off.

So What? It Doesn't Matter

None of this matters in the least. One additional rate hike will not tip the economy into recession. One rate hike less, or even a rate cut will not prevent a recession.

Economic imbalances are staggering following decades of Fed officials blowing repetitive economic bubbles of increasing amplitude.

Dot Thought Thickens

That's what the dot plot of expected rate hikes looked like in December. It will not look that way following the next FOMC meeting.

Over time, the dot plot always thickens.

The December meeting will show unanimous or near-unanimous opinion that the Fed is doing a brilliant job for the current year.

What Does Matter

Suddenly, There's No Appetite for Bond Deals as Spreads Widen. And the BIS Fears "Bulge of BBB Debt" and "Financial Cycle" Default Waves.

The BIS warns of $3.15 trillion in BBB corporate debt hovering just above junk that "if and when the economy weakened, it is bound to put substantial pressure on a market that is already quite illiquid and, in the process, to generate broader waves."

Economy Isn't a Truck

No matter how hard the Fed tries, the economy can't be steered like a truck by a group of economic wizards. The economy isn't a truck.

Attempts to steer the economy coupled with inane fear of routine price deflation are a key reason we have these bubbles.

CPI Deflation Not a Problem

The BIS did a historical study and found routine deflation was not any problem at all.

"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For further discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Tinder Stacked a Mile High

Real World

In the real world, bubbles eventually matter.

My assessment stands: A Fed-Sponsored Economic Bust is Coming no matter what the Fed says or does now.

Mike "Mish" Shedlock

Comments (14)
No. 1-11
Sechel
Sechel

government shutdown and tariffs will have a far bigger impact on GDP growth. Companies needing permits for activity will have to wait. Companies buying raw materials have to pay more. My local appliance store said this December large price increases were planned across the board by all manufacturers.

lol
lol

JP is now completely surrendered to the "markets",he's there prison bitch

Webej
Webej

It is steered like a truck. Foot on the accelerator and brake pedal at the same time. An occasional jack-knife. Lot of extra wear and tear on the engine.

Not_Wagner
Not_Wagner

I don't get it why you call it "A Fed-Sponsored Economic Bust".

  1. Bubbles happened before Fed/Central Banking. The boom and bust cycles are natural.

  2. Monetary policies are just as old humanity; and they existed before Fed/Central Banking. Except those policies were implemented either by authoritarian leaders/Kings and/or Precious metal miners.

KansasDog
KansasDog

"Ok, you buy stocks because im getting ready to run my mouth tomorrow". Probably made millions for those in the know today.

Blacklisted
Blacklisted

An economic bust will be led by govt's at all levels, as they raise taxes, fees, and confiscate assets to save govt pensions and their perks.

gregggg
gregggg

Just wait til Moody's reclassifies those bonds as this mess sorts out.

DFWRealEstate
DFWRealEstate

Interesting that Powell now says he "wouldn't hesitate" to tweak the balance sheet normalization plan. I suspected it was only a matter of time before his private equity/Wall Street roots started showing. What a difference a month makes!

RonJ
RonJ

"In the real world, bubbles eventually matter."

QE aside, the fear was that the FED would raise rates too soon, causing a 1937 scenario. Well, they delayed and delayed and delayed raising rates and there are now pundits talking of 1932 moments and monetary resets. Kind of a damned if you do, damned if you don't, scenario.

ReadyKilowatt
ReadyKilowatt

BBB grade debt? What's in your 401(k)?

shred1
shred1

QE4, coming up!