Powell: "Front End Loading"

Macro Perspectives

The Fed delivered on the expectations of a 75 basis point rate hike. That takes us to 1.5% Fed Funds rate, in an 8% inflation world.

The quick explanation on what happened - Jay Powell called the 75 basis "front-end loading."

Beyond everything else (the Fed statement, Powell's prepared remarks, and an hour's worth of Q&A), this language is what stuck out to me.

By definition this is doing something at the beginning, rather than spreading it out over a term. Does it mean the Fed is done? Unlikely, but not impossible.

Think about it: Taking the Fed Funds to 1.5%, as inflation continues to post higher highs (at 8.6%) is deemed to be an aggressive, "front-end loaded" inflation dampener by the Fed.

Here's the way I see it...

The global sovereign over-indebtedness makes it impossible for a rational interest rate response to inflation. That's why the Fed has, instead, opted for the tough talk strategy. Earlier this year Powell explicitly said they were targeting the job market to bring down demand (i.e. increase unemployment). That rhetoric has influenced a bear market in stocks, tighter financial conditions, and now layoffs.

This resulted in an inverted yield curve back in March, which has a history of preceding recession…We had a contraction in GDP in Q1, and it appears now that Q2 will likely be negative too. That would be two consecutive quarters of negative GDP, which is recession, by definition.

Now, in addition to the limitations on what the Fed can do with interest rates, we've talked a lot about the limitations they (and other global central banks) have with reversing QE (quantitative tightening). We even questioned whether or not the Fed would even be able to begin the process of shrinking its balance sheet, before it would be forced back into QE. QE is Hotel California of monetary policy -  "You can check in but you can never leave."

The Fed began dipping its toe in the water on June 1, beginning with a small test of asset sales. So far, the proxy on the corporate bond market (the investment grade ETF, LQD) has plunged back to pandemic-crisis levels.

Will there be a crisis in the corporate bond market? Unlikely, the Fed will not let it happen.

Here's what I mean: In Europe, the mere plan of ending QE next month has resulted in a blow-out of sovereign bond yields - the beginning of another sovereign debt crisis. As history has predicted for us, the ECB called an emergency meeting to plan a response: yet another new asset purchase program. It will be more QE, by a different name.

If we connect all of the dots here, it looks like a Fed that thinks inflation is going to come down to them (i.e. not a rate hiking campaign intended to catch up to inflation). Meanwhile, the ECB is reminding us that once the central banks crossed the line (ripped up the rule book) in response to the Great Financial Crisis, they have since, and always will be ready to do whatever it takes to prevent major market and economic shocks (i.e. more and more QE/intervention).

This path continues to look like it leads to the eventuality of a reset of global debt, and a new monetary system.

For now, it seems that stocks may have already discounted a recession induced by higher interest rates. If recession is here, rates may be closer to the peak of the cycle, than has been thought. Add to that, we're getting confirmation (from the ECB's actions) that the central banks will continue to intervene where necessary to defend against shocks.

This should set up well for the stock market from here - a positive formula.