Powell Disappoints Wall Street

The Message of Today’s Rate Hike [The Daily Reckoning] March 22, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Powell Disappoints Wall Street - The stock market decided it didn’t like today’s rate hike after all… - The Fed is pursuing a contradictory policy… - Then Jim Rickards shows you why the Fed perpetually gets it wrong… [External Advertisement] [[BREAKING] Pentagon to Spend Billions on "Living Missile"]( Air Force Magazine calls it "transformational." The Wall Street Journal calls it one of the Pentagon's "highest priorities." National Defense Magazine reports "Eye-popping budget" for it. This small company won the first contract to build them! [Get The Name Of The Company Here]( Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, Like an expecting father pacing the ward… markets were pacing the trading floors today. Rate hike or no rate hike? Would the bank wobbles back the Federal Reserve into inaction? Would the cigars go passing around — or not? Word came issuing at 2 p.m. Eastern. A 0.25% hike it was. Thus the federal funds rate dangles between 4.75–5%... its highest point since 2007. What are we to make of today’s increase? Bright MLS’ Ms. Lisa Sturtevant: The decision to continue its rate increases comes as the Federal Reserve stood between a rock and a hard place, battling conflicting goals of bringing inflation down with stabilizing uncertainty in the financial sector. Today’s decision suggests the Fed believes the worst of the banking crisis is behind us, noting in its press release that the U.S. banking system is sound and resilient. Just so. Yet what did Wall Street think? Was today’s hike a boy or a girl? The stock market could not decide initially. Stocks took a bounce — but only slightly. Yet within the hour they took authentic jumps… and the cigars began passing around. Why? Because Wall Street deciphered the Federal Reserve’s post-announcement telegraph. From which: The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. “Some additional policy firming” is a noticeable retreat from the Federal Reserve's previous threats of “ongoing increases.” Wall Street believed — evidently — that Mr. Powell and mates will soon abandon the warpath. Yet within another hour the stock market undertook a reassessment… and the Dow Jones Industrial Average suddenly took a 250-point swooning. The swooning continued clear through to closing whistle. The index ended trading down 530 points. The S&P 500 shed 66 points while the Nasdaq Composite retreated 190 points of its own. Perhaps the Federal Reserve’s orientation is not so “dovish” after all. Mr. Mike Loewengart of Morgan Stanley Global Investment: Market watchers could interpret today’s rate bump as support for the Fed viewing recent bank woes as idiosyncratic, which is a good thing for those worrying about systemic cracks in the system. Further, the Fed hinted a pivot may be coming soon, so another piece of good news for investors to chew on. But keep in mind that this doesn’t mean rate cuts are coming anytime soon, and the Fed has hinted it will do whatever it takes to get inflation back near 2%. So even if the Fed stops at 10 hikes, volatility is likely to remain the name of the game. Jim Rickards appeared with Charles Payne of Fox Business this afternoon. There Jim dismissed the dovish theory: Inflation is job one. If there’s going to be a recession, too bad, if unemployment goes up, too bad. We’re not going to stop until we’re at a level, the so-called terminal rate, where inflation will come down on its own… They’re not done. I would expect that they’ll raise again in May… A lot of other bad things may happen, but they’re determined to get inflation under control. Yet what about the Federal Reserve’s balance sheet? It had been culling the balance sheet to accompany its rate increases. But the recent bank rescues entailed a great balance sheet expansion. Thus the Federal Reserve works at cross purposes, explains Jim: Quantitative tightening is out the door because of this bank lending program. They’ve invited every bank in the United States to send them $1 trillion of bonds, and they’ll pay for them at par with newly printed money. So that’s going to be quantitative easing. So they’re easing on balance sheet side and tightening on the rate side at the same time. So this is the finesse. They aren’t trying to have it both ways. But that means more rate hikes if they’re going to be easing on the balance sheet side. Thus the Federal Reserve is running with the hare and hunting with the hounds. It is running with the hare of balance sheet expansion… while hunting with the hounds of interest rate raisings. Can it manage the finesse? We lack a definitive answer. Yet given the Federal Reserve’s nearly impeccable record of failure, we hazard it cannot. Gold arrived at its own verdict this afternoon — up $36 and change. Below, Jim Rickards shows you why the Federal Reserve perpetually botches its job. Read on. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: Jim Rickards warned his readers about today’s market reaction to the Fed’s announcement. But he fears that today’s market action is just the beginning. In [this emergency broadcast]( Jim shows you what you can do to protect yourself going forward. Jim says this is one of his most urgent and highly anticipated events of the last 12 months, so we hope you’ll watch my urgent presentation. [Simply click here to get access.]( [Has World War III Just Begun?]( [Click here for more...]( NATO sends tanks to Ukraine… Russia prepares for a winter offensive… Is the beginning of World War III? I’ve just released an urgent message with my thoughts. But more importantly, I’m offering to send you an exact playbook on what I see playing out in the world and what you need to do to prepare. [Click Here To Watch My Short Video]( The Daily Reckoning Presents: “Once you start down the path of manipulation, it requires more and more manipulation to keep the game going”… ****************************** Why the Fed Keeps Getting It Wrong By Jim Rickards [Jim Rickards] JIM RICKARDS The market’s in a highly unstable state right now. These violent swings show the inadequacy of the standard models that the Fed and other mainstream analysts use. The Fed assumes so many things about markets that are simply false, like that markets are always efficient, for example. They’re not. Under volatile conditions like these they gap up and down — they don’t move in rational, predictable increments like the “efficient-market hypothesis” supposes. The problem is that the Fed’s models are empirically false. Studies have proven how faulty their models are. The Fed has the worst forecasting record in the world. It’s basically been wrong every year since 2009. Equilibrium models like the Fed uses basically say the world runs like a clock and occasionally it gets knocked out of equilibrium. And all you have to do is tweak policy or manipulate some variable to push it back into equilibrium. It’s like resetting a clock. That’s a shorthand way of describing what an equilibrium model is. They treat markets like they’re some kind of machine. It’s a 19th-century, mechanistic approach. But traditional approaches that rely on static models bear little relationship to reality. Twenty-first-century markets aren’t machines and they don’t work in this clockwork fashion. The Fed uses equilibrium models to understand an economy that is not an equilibrium system; it’s a complex dynamic system. The Fed uses the Phillips curve to understand the relationship between unemployment and inflation when 50 years of data say there is no fixed relationship. The Fed uses what’s called value-at-risk modeling based on normally distributed events when the evidence is clear that the degree distribution of risk events is a power curve, not a normal or bell curve. As a result of these defective models, the Fed printed trillions of new money beginning in 2008 to ‘stimulate’ the economy, only to produce the weakest recovery in history. Need proof? Every year, the Federal Reserve forecasts economic growth on a one-year forward basis. And it’s been wrong every year for the better part of a decade. When I say ‘wrong’, I mean by orders of magnitude. If the Fed forecast 3.5% growth and actual growth was 3.3%, I would consider that to be awesome. But the Fed would forecast 3.5% growth and it would come in at 2.2%. That’s not even close, considering that growth is confined to plus or minus 4% in the vast majority of years. Right now the economy faces severe headwinds in the form of geopolitical instability, inflation and ongoing supply chain disruptions. The chances of recession are very high. The Fed needs interest rates to be between 4% and 5% to fight recession. That’s how much “dry powder” the Fed needs going into a recession. In September 2007, the fed funds rate was at 4.75%, toward the high end of the range. That gave the Fed plenty of room to cut, which it certainly did. Between 2008 and 2015, rates were essentially at zero. The good news, if you can call it that, is that the current fed funds target rate is between 4.75%-5%. That’s what today’s rate hike brought it up to. So, if we have a recession this year the Fed has the dry powder to fight it. But then the cycle just starts all over again. Here’s the deeper problem with all the Fed’s manipulations… [[CHART] Could Inflation Hit 20%+ In 2023?]( [Click here for more...]( Take a close look at this scary chart pictured here… What you see is the money supply in America… And as you can see, the number of dollars in circulation has exploded in the last few years. In fact, more than 80% of all dollars to ever exist have been printed since just 2020 alone! Which is why some say inflation could soon explode even higher than it is now, to 20% or more. And if you’re at or near retirement age you must take action now to protect yourself… otherwise you risk losing everything… [Click Here To Learn More]( The problem with any kind of market manipulation (what central bankers call “policy”) is that there’s no way to end it without unintended and usually negative consequences. Once you start down the path of manipulation, it requires more and more manipulation to keep the game going. Finally it no longer becomes possible to turn back without crashing the system. Of course, manipulation by government agencies and central banks always starts out with good intentions. They are trying to “save” the banks or “save” the market from extreme outcomes or crashes. But this desire to save something ignores the fact that bank failures and market crashes are sometimes necessary and healthy to clear out prior excesses and dysfunctions. A crash can clean out the rot, put losses where they belong and allow the system to start over with a clean balance sheet and a strong lesson in prudence. Instead, the central bankers ride to the rescue of corrupt or mismanaged banks (hello, SVB!). This saves the wrong people (incompetent and corrupt bank managers and investors) and hurts the everyday investor or worker who watches his portfolio implode while the incompetent bank managers get to keep their jobs and big bonuses. All it does is set the stage for a bigger crisis down the road. It certainly hasn’t helped the economy. In my 2014 book, The Death of Money, I wrote, “The United States is Japan on a larger scale.” That was nine years ago. Japan started its “lost decade” in the 1990s. Now their lost decade has dragged into over three lost decades. The U.S. began its first lost decade in 2009 and is now in its second lost decade with no end in sight. The economic damage from the lockdowns certainly didn’t help. What I referred to in 2014 is that central bank policy in both countries has been completely ineffective at restoring long-term trend growth or solving the steady accumulation of unsustainable debt. In Japan this problem began in the 1990s, and in the U.S. the problem began in 2009, but it’s the same problem with no clear solution. The irony is that in the early 2000s, former Fed Chair Ben Bernanke routinely criticized the Japanese for their inability to escape from recession, deflation and slow growth. When the U.S. recession began during the global financial crisis of 2008, Bernanke promised that he would not make the same mistakes the Japanese made in the 1990s. Instead, he made every mistake the Japanese made, and the U.S. is stuck in the same place and will remain there until the Fed wakes up to its problems. Bernanke thought that low interest rates and massive money printing would lead to lending and spending that would restore trend growth to 3.2% or higher. But he ignored the role of velocity (speed of money turnover) and the unwillingness of banks to lend or individuals to borrow. When that happens, the Fed is pushing on a string — printing money with no result except asset bubbles. That’s where we are today. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. All week I’ve reached out, warning my readers about [a strange pattern that was set to advance in the markets today at 2:00 PM ET…]( A pattern that has preceded nearly every major market crash going back to 1919. Now with the announcement made and things playing out just the way I said, you have to decide. Are you going to ignore history? Or are you going to [take action and preserve your family’s wealth and legacy?]( The choice is yours, of course. But you have to act fast, because at midnight tonight, my [emergency broadcast]( will be removed from the internet. And everything from my free 10X crash trade recommendation… To your shot at discovering how a simple “bear market” has given people the chance to take home profits of as high as 740%...832%...900%...and even 1,000% in a matter of months… Will be gone. So please, I encourage you to [click here now]( before time runs out. Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. 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