Despite talk of patience, once a tightening cycle ends—or pauses, if you must—the next move is down, not up, reports Landon Whaley.
Citi (C) recently released a research report (prior to the March FOMC meeting) breaking down the latest round of commentary from Fed Chair Jerome Powell that made me scratch my head. Citi believes “the Fed [will] raise rates twice more this cycle” and that the Fed’s dot plot in March may “show a desire to raise rates this year.”
First, with the Fed failing to raise rates in March, they are officially “paused.” But remember what we’ve previously discussed: Technically the Fed never pauses, because this implies that it stops raising rates for a period of time and then begins to raise them again, but this has never happened!
In each of the previous tightening cycles, once the Fed stops raising rates, its next interest rate policy move is to cut rates, always. “Never” and “always” aren’t words one gets to use very often when discussing economies or markets, so when they apply, you should take special notice. Though, it would be fair to point out that this has not been a typical tightening cycle, as it started out with only one quarter-point move in each of the first two years, which was not what was projected in their dot plot.
Second and more importantly, there hasn’t been a single economic data point in the last five months that the Fed can hang a rate hike on — not even the distorted, net export-driven, +8 basis-point bump in Q4 GDP. U.S. growth and sentiment have been deteriorating across a wide swatch of data sets and surveys for several months now. Feel free to review any of our reports over the last 20 weeks to get your fill of the data!
Third, even if the data was rate-hike-worthy, the presumption is that the Fed is both independent and data-dependent, but in reality, the Fed is fully politicized.
While this political reality was crystal clear with Ben Bernanke and Janet Yellen, Powell had me fooled as a guy who was both data-dependent and not leaning on either side of the aisle.
But two weeks after Trump tweeted: “The only problem our economy has is the Fed,” and just five short weeks after raising rates and reaffirming the plan to normalize further, Powell was in front of a bank of microphones saying “… the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate …"
Folks, that was a 180-degree dovish pivot that would make M.C. Hammer proud!
Trump put Powell on blast again last week, saying, “we have a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentleman that likes a very strong dollar in the Fed.”
If Powell folded like a cheap lawn chair to a tweet about the Fed, what do you think his response will be on March 20 to a C-SPAN call out, practically by name?
The bottom line is that history tells us there won’t be any more hikes, because the Fed never pauses. The data doesn’t support another rate hike and tells us that if they do hike, they’re pulling the next recession even closer. And the final nail in the Fed’s tightening cycle is our Tweet-blasting President. The Fed’s in a box, and as such, I once again find myself on the other side of the Old Institution as I fade Citi’s call for more rate hikes, and continuing buying the dip in Treasuries, gold and gold-related equities.
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