Powell Hiked. What’s Next?

It gets trickier from here on out… by design. [The Rude Awakening] May 04, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Powell Hiked. What’s Next? - As expected, Chairman Pow and Co. hiked rates by 25 basis points. - The Fed Funds band stands at 5.00% to 5.25%. - What’s the next move? A hike, pause, or cut? No one knows. [US Attack on Nord Stream a Covert “Act of War”?]( [Click here to learn more]( In this shocking presentation, new evidence reveals the TRUTH about the attack on Nord Stream, and why millions of Americans would be devastated from the fallout. [See for yourself.]( [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning from a radiant Northern Italy. Finally, Powell hiked. We, and the rest of the market, knew he would. Now comes the fun. I remember getting soused in London back in the day and saying to my boys through the hangover, “Man, I shouldn’t have had that last shot of tequila.” It’s always ridiculous when a drunk blames the last drink he had, instead of the first dozen or so he chugged down. And so it is with the Federal Reserve. They say, “This may be the hike that breaks the market.” Really? Not the first eight rate hikes? You know, the ones that started a year too late? Our position remains the same. At the same time, the fact that Powell was “an old man in a hurry” made him predictable. We knew he would raise rates and correctly predicted how much he’d raise rates every time. Now, that picture is clouded. But before we get to Jay Powell’s statement, let’s hash out the Fed’s monetary policy transmission mechanism. We haven’t done that before, and it may behoove you to know more about it. The Fed’s Monetary Transmission Mechanism The Federal Reserve's monetary policy transmission mechanism is the process by which changes in the Federal Reserve's monetary policy, including changes in the Federal Funds rate, are transmitted to the broader economy. The transmission mechanism operates through various channels (see the diagram below) that affect the behavior of households, businesses, and financial institutions. Here are its main components: - Short-term interest rates: Changes in the Federal Funds rate, which is the interest rate at which banks lend to each other overnight, affect short-term interest rates in the economy. This can affect borrowing and lending decisions by households and businesses. - Long-term interest rates: Changes in short-term interest rates can also affect long-term interest rates, typically set by the market. This affects borrowing and investment decisions by households and businesses, including decisions about mortgages and business investments. - Asset prices: Interest rate changes can affect financial asset prices, such as stocks and bonds. This affects the wealth and spending decisions of households and businesses. - Exchange rates: Changes in interest rates can also affect exchange rates, which impact international trade and financial flows. - Credit conditions: Changes in interest rates and asset prices affect the availability and cost of credit, which affect the behavior of households and businesses. - Expectations: The transmission mechanism can also operate through changes in expectations about future economic conditions, which influence the behavior of households, businesses, and financial markets. Overall, the transmission mechanism is complex and operates through various channels, making it difficult to predict the precise effects of changes in monetary policy on the economy. However, using various tools and techniques, the Federal Reserve aims to influence economic conditions to support its policy objectives, such as price stability and maximum employment. Here’s the view of the different channels affecting the transmission mechanism: [SJN] Credit: [ResearchGate]( Now, what did our fearless leader say? [Warning: Will “Bidenflation” Destroy Your Retirement?]( [Click here to learn more]( If you’re like most Americans, you’ve worked hard for decades to build your financial legacy. And now, as a result of Biden’s disastrous money printing policies, that’s all at risk. According to one top retirement expert, “Bidenflation” threatens to destroy your retirement and make your hard-earned savings worthless. That’s why you must take action right away to protect yourself… [Click here now to get the simple, step-by-step actions to survive “Bidenflation.”]( [Click Here To Learn More]( Here’s What Jay Powell Said Let’s do this in bullet points, courtesy of [Zero Hedge]( - FOMC omits prior language saying “some additional policy firming” may be warranted, suggesting Fed could pause at the next meeting - FOMC will consider various factors “in determining the extent to which additional policy firming may be appropriate.” - The vote was unanimous. - FOMC says tighter credit standards will likely weigh on inflation and the economy. - QT continues: The Fed maintains its plan to shrink its monthly balance sheet by as much as $60 billion for Treasuries and $35 billion for mortgage-backed securities. This is where it gets tricky. Now that “additional policy firming” has been removed, is a pause coming? And after that pause, will he hike again? Or is there no pause and some hiking? The market thinks Powell will start cutting immediately. I disagree with this view entirely. Jim Rickards’ Senior Analyst Dan Amoss posted this comment from Powell’s press conference in our Editorial Team Slack Board: We on the committee have a view that inflation is going to come down. In that world, it would NOT BE APPROPRIATE to cut rates. It's not our forecast. Non-housing services inflation has not improved very much. Demand will have to weaken. In that world, it would NOT be appropriate to cut rates. It still sounds hawkish to me. Here’s What The Boys Say Good friend and colleague Dave Gonigam wrote this over at the [5 Minute Forecast]( On the one hand, it’s a nothingburger: The Fed has telegraphed well in advance that it will raise the fed funds rate another quarter percentage point, to 5.25%. On the other hand — and as Jim Rickards has been saying for several days now — 5.25% is likely to be the breaking point for the markets, the economy, and the banking system. Why would Jim say that? Here’s a clue: [SJN] Credit: [@zerohedge]( Is this the straw that breaks the camel’s back? Could be. Good friend and [Daily Reckoning]( Editor Brian Maher wrote this (bolds mine): Yet as we noted last month: Small businesses nationwide are presently filing bankruptcy claims at the fastest gait since the pandemic terrors of 2020. We note further that the technology sector is heaving employees overboard at the greatest rate since the 2001 “dot-com” calamities. Perhaps we are witnessing a drastic lowering of the barometric pressure. Perhaps we are witnessing the formation of a very low-pressure system. We simply do not know. Yet we note that the first-quarter gross domestic product “expanded” at a weak and wan 1.1%, annualized. This represents a receding from the 2.6% economic expansion of the previous quarter. He continues: And we must consider the squalling rains that have descended upon the banking sector. First Republic Bank, now dead, now buried, represents the second-largest bank failure in the long history of American banking. Some six banks have died the death since March — including the behemoth Credit Suisse. The buzzard Union Bank of Switzerland, known now as UBS, presently scavenges upon its remains. Thus lending standards are undergoing a clamping. Credit is stingy. For an economy thoroughly and uncompromisingly dependent upon the expansion of credit, this represents an ill omen. That is why we believe markets are correct — and why the chairman of the Federal Reserve system is incorrect. Deteriorating conditions will direct him to the straightabout. We hazard he will lower his target rate by year’s end. The upshot is that Brian agrees with the market that Powell must cut by year-end. Wrap Up Pure conjecture here: Powell wants to hike again. He hates it when lawmakers tell him what to do. He hates when politics interfere with his job. I wouldn’t be surprised if he hiked the next meeting again, depending on the inflation numbers and if any more banks blow up. Equally, I wouldn’t be surprised if he paused and left rates elevated until January 2024. But I would be surprised if he cut anytime soon unless the bottom falls out of the stock market. Just remember, that’s pure conjecture. And remember to check the Morning Reckoning later this morning… I write about why it’s so hard for “America” to be an impartial peace broker. [Sign up here]( if you haven’t already! Have a great day ahead! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening In Case You Missed It… Today’s the Big Day: Does Powell Hike? [Sean Ring] SEAN RING Happy Hump Day from a sunny Asti! Today feels both important and anti-climactic. What the Fed does matters. Unfortunately. I wish for a return to the days when the Fed’s actions were an afterthought. But we don’t live in that world anymore. On the other hand, a rate hike of 25 bps is nearly a certainty and is priced into the market. Well, it looks like the market priced it in yesterday. The SPX and Nasdaq were each down 1.08%, while the Dow fell 1.16%. The likeliest scenario for the drop is that the markets are incredibly concerned about the regional bank situation. You know, the problem the Federal Reserve, Treasury, and FDIC created themselves. And that’s the onion. We know Powell wants to hike more and is not keen on watching stock markets. But he can’t hike to the point that his banks break. Like we said many times, the Fed has painted itself into a corner by not starting the hiking cycle soon enough, and then hiking too quickly once it belatedly started. As Vivek Ramaswamy wrote in his [Wall Street Journal]( piece]( “The global market will hang on every word of every FOMC press conference to see what a dozen central planners have to say. That won’t be because these planners have any special insight. Everyone will listen to see what the Fed may destabilize next.” That’s a swift kick in the gooey bag if I ever read one! Let’s stick with Mr. Ramaswamy as we open today’s Rude. An Op-Ed For the Ages If you haven’t heard of him, Vivek Ramaswamy is an Indian-American entrepreneur running for the Republican nomination in 2024. He’s the one of whom [Don Lemon said, “...whatever ethnicity you are…”]( which led to Lemon’s firing. On that score alone, we like Ramaswamy. Though he graduated from Harvard and Yale Law School, Ramaswamy is refreshingly anti-woke. And he seems to lean toward Austrian Economics over Keynesian. How this miracle took place, in spite of his Ivy League education, is a mystery to me. He is the founder and executive chairman of Roivant Sciences, a biopharmaceutical company that creates and develops innovative medicines. He’s allegedly worth roughly $600 million. Ramaswamy has been recognized as a Forbes 40 under 40 honoree and a World Economic Forum Young Global Leader. Ok, no one’s perfect. But what Ramaswamy wrote in the Journal is worth noting. Most presidential candidates have only a passing knowledge of economics. This guy intimately understands how monetary policy works. [He writes]( (bolds mine): Attempting to balance low inflation and full unemployment—trying to hit two targets with one arrow—has proved to be disastrous since the Phillips Curve cult gained prominence at the Fed around 2000. If elected president, I will return the Fed to a narrower scope: preserving the U.S. dollar as a stable financial unit to help prevent financial crises and restore robust economic growth. Beginning in the 1980s and lasting through most of the 1990s, the Fed governors, including Vice Chairman Manley Johnson and Wayne Angell, used a framework first adopted by Paul Volcker in 1982 to stabilize the dollar. The idea was to consider the dollar’s value in terms of commodities, letting it serve as a reference point for other nations’ floating fiat currencies. This provided financial stability for two decades following the stagflation of the 1970s. Beginning in the late 1990s, the Fed’s scope drifted to include “smoothing out” business cycles.This was a mistake, since business cycles serve a healthy function by transferring the assets and employees of poorly run companies to more capable management. Even worse, the Fed’s actions often exacerbated business cycles by creating transitions that create boom-bust-bailout cycles instead. Business cycles indeed serve a healthy function. But if you’re an overpaid CEO, you never want the party to end. And speaking of boom-bust-bailout cycles, let’s look at another Fed-created problem: the regional bank run. [URGENT! The Truth About Biden’s Role In the Nord Stream Attack]( President Biden has denied all involvement in the Nord Stream pipeline attack… But in [this SHOCKING presentation]( one man reveals evidence that Biden not only ordered the attack… But that it will devastating consequences for every American citizen… Including crippling fuel shortages… widespread “Biden blackouts”… and energy bills rocketing to $1000! [Click here to learn the TRUTH, and how to protect yourself from the fallout](. [Click Here To Learn More]( The Regional Bank Headache Let’s look at some of the regional bank stocks from yesterday: [SJN] That chart may be difficult to see, but Territorial Bancorp (TNBK) was down over 36% yesterday. In the lower right corner, Western Alliance Bancorp (WAL) was down merely 15%. It was an entirely avoidable bloodbath. Let’s talk about this Fed-induced problem. I wrote how upset I was that the Fed, Treasury, and FDIC didn’t just let Silicon Valley Bank (SIVB) go bankrupt. But with clientele like Oprah, Harry, and Meghan, the Democrats couldn’t let that happen. And that’s a shame. Because had the Fed just let SIVB go, this regional bank problem wouldn’t exist. When the USG said they’d bail out SIVB, initially, they said they’d cover all deposits in the system regardless of size. (That’s absurd on its own merits.) Useless Yellen later said the Treasury wouldn’t insure all deposits, but would review things on a case-by-case basis. This signaled to the world that there’s a special club, and you ain’t it (a la George Carlin). What was a perfect opportunity to take the froth off the top of the market became a blunder that put pressure on the regionals. Why is that? The question became, “Why would you stick your money in the regionals when they might not be protected?” Of course, we still have a commercial real estate problem. But trust and safety are a far bigger problem, especially when you’re dealing with business deposits. And not only that, the regionals weren’t getting audited worth a good goddamn. Get a load of this. An Auditor Goes 3-for-3 I try to avoid The Financial Times, or as it’s commonly called, The Pinko Paper, because it’s such a lefty Eurotrash rag nowadays. But this article made me sit up. [SJN] Credit: ft.com Can you believe KPMG audited these banks? Look, it’s tough to predict a bank run. But there wasn’t a sniff of “they’re long US 30-year bonds and are unhedged.” Or “They may have problems with crypto.” This was another problem from 2008 that was never addressed, let alone solved. When you pay your auditor to audit you, you’ve had to have done some severe damage for them to raise the flag. So these banks just kept on trucking without a word of warning to their shareholders and customers. It’s ludicrous. Wrap Up The Fed’s rate decision today is almost an anti-climax. What will Chairman Pow do next? Continue to raise rates despite the bank run? Or will the Fed signal a pause to let the US economy and its bank catch its breath? All will be revealed this afternoon. Have a great day ahead! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening [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 Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, 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@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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