Fed Fumbles, Dow Tumbles, Bonds Go for Broke

Powell finally admitted that inflation is higher again and that the Federal Open Market Committee that sets the Fed Funds Rate expects inflation will be even a little higher still in 2025. As a result, the FOMC made the one rate cut still expected of it by markets this week, but showed clearly in its dot plots for future interest rates and its statements that it expects only half as many cuts in 2025 as it expected at its last meeting it would do in 2025.

So, rising inflation is changing the game. This was particularly stated clearly by Powell in his answer to the first question that popped up after his little speech at the presser in which he made clear that the reduction in anticipated interest cuts is due to inflation being higher. Even so, any cuts beyond now will depend on seeing “further progress on inflation.” (In other words, if there is no further progress on getting inflation to start moving down again by the next meetings that will likely mean no more rate cuts until that is seen. Inflation holding where it is will not be enough to get another rate cut.)

Powell even said that uncertainty about what is coming for inflation is higher among the FOMC members than it was a previous meetings this year. Finally, contrary to one claim in the article below by Zero Hedge, Powell made clear in the Q&A that the uncertainty about inflation had almost nothing to do with Trump’s tariff policy plans for 2025 and was anchored in what has already been happening in 2024. He went so far as to point out that the Fed’s forecast for inflation for this year has jumped half a percentage point higher than it was back in September because of higher inflation that came in during September and October. Here, Powell was humbly honest.

Once again we’ve had a year-end projection for inflation, and it’s kind of fallen apart as we’ve approached the end of the year. That is certainly a large factor in people’s thinking. I can tell you that might be the single biggest factor. Inflation has, once again, underperformed relative to expectations…. We really want to see progress on inflation. As we think about further cuts, we’re going to be looking for progress on inflation. —Jerome Powell

Powell said that the Fed is not currently making any policy decisions based on what may happen with tariffs. This is all about current inflation and the trajectory that inflation is already on for 2025.

Markets tremble and fall

Apparently, stock and bond markets did not expect inflation would rise enough to affect the Fed’s interest policy because the Dow fell off a 1,100-point cliff when it heard that the Fed—due almost entirely to rising inflation—expected to cut its cuts by half. For the first time in half a year, 10-year bond prices plunged, trading with a yield suddenly above 4.5% (and still climbing), which has proven in the past to be the level at which Treasury bonds start giving serious competition to stocks. That was a twelve-basis point rise in yields in an hour and a half from when Powell said the number of anticipated rate cuts going forward had just been reduced by half.

Not only did the Dow put in its longest downhill run since 1974 by hitting eleven down days in a row, but it also put in its steepest point plunge in a single day since August. Obviously, market makers do not read The Daily Doom, or they would have expected differently, given what’s been said here about inflation all along with next to no one anywhere else agreeing with me.

It is almost as if all markets were stunned to find out that the signs of rising inflation were all real and that the Fed is watching them intently and is ready to change policy right away if inflation keeps rising. Waking up can be painful. I’m sure many wished they had not gotten out of bed (or more like they hadn’t gotten dumped out of bed this morning, as that is more what this felt like to them).

So far, the Dow has corrected 6% since its last high.

The whole US stock market was rocked in a completely broad-based way, as the S&P, which had been doing a lot better than the Dow, put in its worst day since August, too. All eleven sectors of the S&P fell in a broad realignment to financial realities that investors had avoided seeing. The S&P pulled back almost 3%, and the Nasdaq, 3.5%; even the Russel 2000 fell 3%. While no major index was spared, the worst laggards of all came from the now-fading glory of the “Magnificent Seven,” which many investors seemed to believe only a few months ago couldn’t lose in any significant way for years to come because “AI is the future.” (Apparently the future these days cannot fall like internet companies did back in the days of the dot-com bust, when a crash of high-tech stocks was also presumed impossible back around the year 2000.)

“Good-bye punch bowl. No Christmas cheer from the Fed. Policymakers see higher inflation and lower unemployment in 2024. There is simply no reason to be dovish given that outlook,” said David Russell, global head of market strategy at TradeStation. “The easy lifting is done now that rates are no longer clearly restrictive. It’s a logical time to pause.”

Except they might be far too optimistic if they expect lower unemployment in 2025. We already know that all the job gains in 2024 were phantoms created by the Biden Administration. I reported on that finding by the Fed, which was no surprise here where I’ve said for the past two-plus years that labor metrics are badly broken; yet, they were never worse than they strangely became during this past election year. If Biden’s Alzheimer’s is not too advanced, he’ll remember to pardon himself from everything as his last act before he goes out the door.

One other note of passing interest

I’ve maintained consistently here for some time that the BRICS nations are not about to replace the dollar with a new international trade currency. That could be seen quite plainly in stories about Brazil’s currency, the real, sliding like a banana (republic) peel on ice, and China’s currency, flailing like a tattered flag in a hurricane. Brazil was written about as the most imperiled currency on earth, and China’s constantly failing attempts to shore up the yuan in the past year didn’t come off looking all that stable either.

No one is going to trust these currency stooges to replace the dollar. Compared to them, even the euro and the pound are both instruments of bright and shining glory.