https://www.bnnbloomberg.ca/fed-officials-take-aim-at-inflation-say-ready-to-act-with-vigor-1.1742076
https://www.bnnbloomberg.ca/a-recession-warning-sign-part-of-u-s-yield-curve-inverts-for-first-time-since-2006-1.1743815
https://edition.cnn.com/2022/03/26/economy/inverted-yield-curve-march-warning/index.html
Another day another crisis of some sort. I trust you have put on your financial blinders so you can function in this rapidly changing and not changing environment (is that ambiguous enough to sound like a talking head). Take a look at the 3 articles above. The first, BNN Bloomberg-Fed ready to act, is a discussion of the Fed’s response to inflation as it raising the Fed Fund Rate. The dot plot shown in the article is a relatively new invention of the Fed to signal its thinking. The dots supposedly show the thinking of the voting members of the Fed on interest rate changes. This chart was created because the market made so much noise several years ago about the Fed never saying what they were thinking that the Fed created this and said, in essence, here is what we are thinking now stop asking. If you are confused you are in good company. Remember, the chart has no binding power, it is the equivalent of thinking out loud but it has proven an indication of possible intent in several instances. So the Fed is thinking of acting aggressively. That is a good sign. Now we will see what they actually do. However, the market will react to the perception of movement because the market really doesn’t have anything else to go on. That is why you need to be wearing your financial blinders to help protect from an overload of change that is based on perceived information not necessarily actual information. It’s hard to separate the two.
The
second two articles are hot off the press, so to speak. The articles titled, A Recession
warning sign? and This recession indicator, are from today’s news feed discussing an
inverted yield curve. The CNN article makes the statement that a “yield curve
inversion has preceded every single recession since 1955” which is true. But not every yield curve inversion has been
followed by a recession. A subtle but important difference. An inverted yield
curve by its very nature is very unstable and traditionally corrects itself as
investors and the economy calm down. Having said that, there have been a couple
of times in the last 40 years that the curve stayed inverted for some time
(many months is very unusual but does happen).
What
does it all mean. Well……, as the last sentence in the CNN articles says, “The
harder the Fed steps on the brakes [raises Fed Funds Rates], the higher the
probability the car seizes up and the economy goes into recession”. But
something has to be done to get the excess money out of the system and we have
kicked the can down the road for so long we are losing the ability to kick. Remember
from a previous post I said one of the quickest ways to reign in inflation is
recession, it isn’t a painless method but it usually works. I am afraid there
are only a limited number of options and a slow reversal of the excess money
policy and slowly removing the excess funds from the economy is definitely a
much gentler method of slowing down a raging economy but is infinitely more
difficult and the tools the Fed has are not very good at fine tuning. Regardless
of the impression they try to give, Fed Funds Rate changes and buying or
selling securities from the government controlled pool are more a blunt force
hammer than a fine tuning knob.
Stay tuned as the ride continues.
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