The Fed Is Wrong About The Economy

As of yesterday, all of the Treasury yield curve (the blue line), except for the 30-year bond that ended the day just above 2.55%, was trading lower than the federal funds rate (the green dotted line). The red line is the yield curve just before the Fed hiked in December.

Clearly, the Treasury bond market is telling the Fed that it is very wrong in its assessment of inflation and economic prospects.

Yet here we are…


Understanding the Fed’s Decision

So, what is the Fed thinking?

Well, the Committee sees “sustained expansion of economic activity, strong labor market conditions, and inflation near its symmetric 2% objective as the most likely outcomes, but uncertainties about this outlook have increased.

The Fed statement goes on to say that, in light of these uncertainties and muted inflation pressures, they will be closely monitoring incoming information and act as appropriate to sustain the expansion.

The big change from the last meeting was the Fed’s intent to be “patient” with past policy. Everything appeared to be moving along as expected, now… not so much.

The lone voice of reason was James Bullard, the St. Louis Federal Reserve Bank President. He objected to the decision and voted to cut rates by 0.25%.

Even though the Treasury bond market didn’t react much to the Fed decision today, its pricing in three rate cuts for this year, based on futures trading. That means it expects the economy to take a turn for the worse.


Happy Days Are Not Ahead

There weren’t significant changes to March projections but, the Fed is looking for inflation to drop further this year. Headline inflation is expected to drop to 1.5% while core inflation (excluding food and energy) is expected to drop to 1.8%, well below the target 2% rate.

The Fed is projecting no further rate change this year, a rate cut in 2020, and a rate hike in 2021. So, if the economy plugs away at around a 2% growth rate, the jobs market doesn’t collapse, and inflation remains near the Feds target 2% rate, don’t expect any change in policy.

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