The Fed Is Wrong About The Economy

As you know, the Federal Open Market Committee (FOMC) meets every six weeks to decide whether they need to change policy to coax our economy in the right direction. You also know that the Fed has a Congressional mandate to provide maximum employment and stable prices, which it works to achieve by manipulating interest rates.

Well, Fed Chair Jerome Powell delivered his policy statement and their latest rates decision this afternoon. Drum roll please…: the overnight rate remains unchanged at 2.25% to 2.50%.

Yet Treasury bonds clearly show that the Fed is way off on its assessment of the economy and monetary policy. Long-term Treasury bonds are telling us that short-term rates need to be lower for the economy to grow further, especially since inflation is and has been muted.

But since December, when it moved rates higher, the Fed has been bungling from one meeting to the next. The markets reacted swiftly to its end-of-year mistake. The yield curve flattened and stocks fell sharply into the holidays.

At the time, the Fed was considering two more hikes in 2019 and Powell stated that the balance sheet would continue to shrink for the foreseeable future.

As the carnage unfolded, he and the other voting members of the FOMC backed off previous statements and eventually calmed the stock markets, which have recovered nicely since then.

Then, in May, the Fed decreased the balance sheet reduction to $15 billion per month, with the goal to end the “normalization” process in September, with a little over $3.5 trillion in Treasury securities.


I’m not sure why the Fed thinks the balance sheet is “normalized” at $3.5 trillion, when it was less than a $1 trillion before the 2008 financial crisis. It’s just more evidence that the Fed gang isn’t seeing the world the rest of us see.

Take a look at how the yield curve has developed since just before the December rate hike in the chart below…

1 2 3
View single page >> |

Treasury Profits Accelerator subscribers are well positioned and ready to profit – from   more

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.