The Market Tells Fed Chairman Kevin Warsh “You Blew It Already”

The 30-Year Long Bond Yield Is the Highest in 19 Years.

There was only a 35 percent chance of a rate hike today, but the market reacted as if the decision to stay on hold was unexpected.

30-Year Long Bond FOMC Reaction

At 10:00AM today the long bond yield was 5.10 percent. The yield blasted straight up as Fed Chair Kevin Wash was trying to justify the Fed’s pause.

Essentially, the market doesn’t think much of the Fed decision today, and neither do I.

10-Year Treasury Note Reaction

When Does the Fed Raise Rates?

Only when the market expects it. Rate hike odds heading into the meeting were about 35 percent.

September Rate Hike Odds

The odds of a September hike are now 63.2 percent. But that’s down from a 76 percent chance of at least one hike yesterday.

Fed Chairman Tries to Explain Why an Interest Rate Pause Isn’t a Pause

Earlier today, I commented Fed Chairman Tries to Explain Why an Interest Rate Pause Isn’t a Pause

Reporter Q&A
Message from the Markets

Q: Steve Liesman, CNBC: What message are you getting from the market as to where policy out to be right now?
A: The message from markets is the message from markets. What we are tying to de is get an unfiltered message from markets.
Mish: Warsh rambled on for a minute unwilling to say the message from the markets is rates are too low.
Q: Steve Liesman: I get that Mr. Chairman. An the follow-up question is if the market’s are talking to you, and if it’s real rates are higher, it would suggest that’s where the funds rate out to go.
A: Interpreting markets is an imperfect business. We can think these things are over-determined. Blah blah blah Even though we have not done much in 42 days the markets have done quite a bit.

Why Shouldn’t Rates Be Higher?

Q: Neil Irwin, Axios: Why should rates not be higher today?
A: Rates are higher today than they were 42 days ago. Markets have made decisions because we stepped back in part from trying to influence those. Market judgements have moved up. We are observing them. So I think it’s a mischaracterization to say the markets haven’t reacted because we didn’t move today. We will continue to monitor the markets and see how they react and that can help our decision making when we meet in 7 or 8 weeks. … This is a period of watchful thinking not watchful waiting.
Mish: That is disingenuous. Nobody is saying the markets didn’t react. What we are saying is the Fed is ignoring the markets and doing what it wants.

Explain the Pause

Q:Edward Lawrence, Fox News: What specifically in your mind would be the argument for a pause today?
A: I wouldn’t characterize what we did today as anything like a pause. I would characterize what we did as a rigorous review of the economic situation. I would characterize what we did as a review of the big hard questions. And I characterize it as a view of what our own homework is. If you were to force a description of this as a pause, I would say financial market prices would take the other side of that. The financial markets in this intermeeting period did not pause. They reacted to the inflation data in one direction, strong economic growth in the other direction.
MIsh: A pause by any other name is a pause.

Disingenuous Warsh

I did not expect the Fed to hike today.

Going into the meeting, I commented that I though the odds were more like 15 percent than 35 percent.

But we didn’t expect nonsensical statements as to why a pause isn’t a pause either.

Also note Powell responded to CNBC’s Steve Liesman that “The message from markets is the message from markets. What we are tying to de is get an unfiltered message from markets.”

I am pleased to report we have an unfiltered message in real time.

In case you missed the message, here it is. “Dear Fed you blew it already.”