Fed Doves Take Flight (But We Are Not In Kansas Anymore)

Wise guys trading Fed Funds futures see no more rate hikes in 2019, and a few even imagine a rate cut before year-end. Here are the projections for the next 3 meetings, showing an overwhelming view that the Fed will hold the current 225-250 target rate. Graphics: CME Group

Among other misconceptions promoted in the media about financial markets is the idea that it is bearish when the Fed is raising the funds rate. That is not the case. The Fed raises the funds rate against positive economic activity and/or inflationary activity. And in the age of Inflation onDemand, one is – in my opinion – not much different than the other.

Okay, that’s just a daily chart showing that the funds rate (represented here by the 3 mo. T-Bill yield, IRX) and S&P 500 went in unison to the upside and that IRX began rolling with the market’s post-September problems. But what of the longer-term relationship?

It is very significant that projections of a dovish Fed are in play, if the post-2015 relationship between financial markets and Fed policy is to hold true. From 2008 to 2015 the Bernanke Fed (w/ one year of Yellen) blighted financial markets, inflicting the ZIRP abomination as asset owners (including owners of stock certificates) were enriched while the real economy was drained (real savings is a necessary component of a real economy). Before and after the ZIRP era, the Fed Funds rate was positively correlated to stocks.

It is no secret that I dislike, distrust and have little faith in the man named Donald Trump. But taken at face value, the type of policy he has overlaid on top of Bernanke’s blight has been more honest. That is because it is political, fought for and debated every step of the way. The Fed’s ZIRP era policy (incl. QEs 1-3) was veiled, hidden behind a curtain. It is logical that the Funds rate (and IRX) have resumed positive correlation with SPX.

Bernanke was regarded as a hero who saved the global economy…

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