Are You Still Listening to the Fed?


    by Jim Rickards, Daily Reckoning:

    Markets got hammered today, with the Dow losing 643 points, the S&P losing 90 and the Nasdaq losing 323. What happened?

    Here’s CNBC’s explanation:

    The Dow Jones Industrial Average fell sharply Monday… as the summer rally fizzled out and fears of aggressive interest rate hikes returned to Wall Street…

    Investors are anticipating what could be a volatile week of trading ahead of Federal Reserve Chairman Jerome Powell’s latest comments on inflation at the central bank’s annual Jackson Hole economic symposium.

    As the article says, Jay Powell will speak this Friday at the Fed’s annual confab in Jackson Hole, Wyoming. Markets will be listening closely for clues about the magnitude of the Fed’s next rate increase in September.

    TRUTH LIVES on at

    Incidentally, the latest PCE inflation data comes out Friday morning, which Powell and the Fed will be monitoring closely.

    If the numbers indicate inflation is slowing, the Fed may take their foot off the brake a bit, which is what the market wants. Of course, the opposite is also true, which the market doesn’t want.

    The Fed Is Like EF Hutton

    The fact is investors and analysts hang on every word the Fed says. It’s like the old EF Hutton commercial — when the Fed talks, everybody listens.

    They treat the Fed as the most powerful player in global markets and like an omnipotent force that can stop inflation, stimulate growth, cure unemployment, target interest rates and basically make or break (or is that brake?) the U.S. economy.

    There’s only one problem with that perspective. The Fed can’t do any of those things and really has no idea what they’re talking about.

    They do put on a good show and maintain an aura of mystery. They use sophisticated terminology that to most people indicates great knowledge. Financial journalists play along either because they don’t know any better or just because, well, they have to write about something.

    Everyday investors devour the financial news and play along with the pixie dust narrative of Fed omnipotence like a man overboard desperate for a life preserver.

    But the truth is the Fed is more confused and impotent than most investors. They really don’t know what they’re doing. And as I’ve explained countless times, they use obsolete forecasting models that don’t approximate reality.

    Clear as Mud

    On Aug. 17, the Fed released the minutes of its meeting on July 27. They revealed that some Fed officials want to raise interest rates by “at least” 0.50% in September. That means 0.75% is still on the table.

    Other officials said, “It likely would become appropriate at some point to slow the pace of policy rate increases.” That means 0.50% if the “pace” is 0.75% or 0.25% if the “pace” is 0.50% at the next meeting.

    Other officials said that once policy reached a “sufficiently restrictive level” they would like to “maintain that level for some time.”

    Jay Powell said the July 0.75% rate increase was “unusually large” but would not take another 0.75% rate hike off the table. He also said that rates could rise another point through December.

    Since there are three meetings left this year, that implies rate hikes of 0.50%, 0.25% and 0.25% at the next three meetings. So there you have it according to the Fed minutes. Rate hikes could be 0.75%, 0.50%, 0.25% or simply maintained at an undefined “restrictive level.”

    Got it? It’s clear as mud.

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