The Market Knows What it Knows but Doesn't Know a Darn Thing

Stocks rise if the Fed breathes the slightest hope that it will be cutting interest rates anytime this year, even when that is unlikely during rising inflation. Stocks fall when the Fed speaks the slightest truth about how it may not be able to cut rates and how its members are open to raising them in order to fight rising inflation. The manic-depression of recent US stock and bond market runs on a hair trigger that switches between whispered hints of things that could potentially happen (but probably won’t) and actual words about what everyone really knows is actually happening.

So, stocks fell because the minutes from the Fed’s last FOMC meeting said what any sane person already knew the Fed members were likely saying to themselves, which runs something like this:

“Dang, inflation is holding on hard! I feel like we are getting nowhere this year.”

“Do you suppose we’ll have to raise rates, instead of cutting them like everyone wants?”

“Could be. I guess we’ll do what we gotta do if we gotta do it.”

The markets get rattled and issue their own response:

“What? After almost half a year of getting nowhere, you guys might only lower rates once at the end of the year?”

And I feel like saying, “No dummies. They said they might have to actually RAISE them once. They’ve been saying that for over a month now because it’s really obvious that’s what they need to do to knock inflation back down with a tap on the head; but they’re afraid to because they need to help fund the US government.”

So, the Dow had its worst day in May because …

Minutes from the Federal Reserve’s May meeting raised concerns of persistent inflation, indicating the central bank may not cut interest rates soon.

Ta da, ta dumb. Of course. They raised concerns about the thing we can already ALL plainly see for ourselves if we’re willing to see reality straight on. You don’t lower rates when inflation is consistently rising month after month! In fact, those rising months mean it will take many more consecutive months of falling again before you finally find the confidence to say, “OK, I guest that’s over. We can start moving back to normal policy rates.”

Minutes from the April 30 to May 1 policy meeting of the Federal Open Market Committee released Wednesday stated a lack of progress in recent months toward lower inflation. The minutes also showed “various participants” discussed a willingness to hike rates if inflation did not keep moving lower toward its 2% goal.

That’s not just a willingness to hike rates if inflation keeps rising, but also to hike rates if inflation simply refuses to move lowers.

That’s been clear since March when three months of data showed that is what they needed to do and equally clear all along the way that they are afraid to do it. While investors think six months of falling inflation should be enough to get the Fed to cut rates, they refuse to think that nearly six consecutive months of rising inflation at this point should be enough to get the Fed to raise rates. They only apply their reasoning in one direction. That’s how denial works: Ignore the alternative.

Chicken Powell

Federal Reserve officials grew more concerned at their most recent meeting about inflation, with members indicating that they lacked the confidence to move forward on interest rate reductions….

The meeting followed a slew of readings that showed inflation was more stubborn than officials had expected to start 2024….

“Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” the summary said. “The recent monthly data had showed significant increases in components of both goods and services price inflation.”

The minutes also showed “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” Several Fed officials, including Chair Jerome Powell and Governor Christopher Waller, have said since the meeting that they doubt the next move would be a hike.

And therein lies part of the problem: Chicken Powell keep undercutting the concerns actually expressed at the meeting by clucking during his post-meeting pressers about cutting rates and against rate hikes because he doesn’t want to spook markets into getting tougher, EXCEPT that he desperately needs market to actually get tougher. BUT that would mean a tougher bond market, and the US government has a lot of bonds to sell!

So, he’s not doing what inflation dictates. He’s doing what the government’s needs dictate. There might not be any government officials trying to push him, though I imagine Janet Yellen is pleading for a little mercy; but he knows what side his bread is buttered on. The Fed has a monopolistic government charter to protect, even if it has to bend the government’s rules within that charter that prevent funding the government debt by just keeping interest soft enough for the government so that it can cover its own debt … oh, and no longer rolling off as many of those US government bonds it has been holding in order to ease the interest pressure the US government would otherwise feel when it has to go out and find a lot more buyers outside the Fed for matching new bonds.

Since then, there have been some incremental signs of progress on inflation, as the consumer price index for April showed inflation running at a 3.4% annual rate, slightly below the March level. Excluding food and energy, the core CPI came in at 3.6%, the lowest since April 2021.

However, consumer surveys indicate increasing worries.

That’s because consumers are smart enough to feel and see what a fraud the first statement by financial writers (repeated everywhere) was from the moment it hit the presses. Even if they couldn’t figure out why the statements about CPI didn’t square with what they were feeling, they still, at least, knew that what they are feeling is higher inflation. That's why I focused in my Deeper Dive last weekend on explaining why the financial press’s claims about CPI were a fraud and about what the CPI report really showed if you look at the numbers under the hood and take a look at all the ways CPI graphs out to show higher inflation!

Israel on defense over Gaza offense

Meanwhile, another claim I made this year is that Israel is going to find itself with many fewer friends and eventually with none (in terms of nations, not individuals). That will be true whether it is merited or not. It has nothing to do with what is right. It is just how it is going to play out. (I see truth as it comes at me, not as I want it to be. And that’s how I share it.)

Europe took a big step in that direction as three European countries accepted Palestine as an independent state (though it has no settle boundaries), and several other European countries expressed their wish to do the same, suggesting such conversations and decision were in process.

Netanyahu, having just seen himself posted as “Wanted” (or about to be) by the International Criminal Court that Israel used to use to prosecuted Nazi war criminals, became publicly incensed about the fact that Hamas’ attack on October 7th and Israel’s reprisal, have taken the Palestinian nation on its biggest leap to date toward acceptance as an independent, recognized sovereign nation.

Israel strongly opposes the move, arguing that it amounts to "rewarding terrorism" after the Palestinian militant group Hamas launched its unprecedented October 7 attack on Israel which sparked the bloodiest ever Gaza war…. Foreign Minister Israel Katz charged that "the twisted step of these countries is an injustice to the memory of the 7/10 victims…."

However, Spain's Prime Minister Pedro Sanchez charged that his Israeli counterpart Benjamin Netanyahu's campaign of "pain and destruction" in the Gaza Strip was now putting the two-state solution in "danger….”

Norwegian Prime Minister Jonas Gahr Store said "recognition of Palestine is a means of supporting the moderate forces which have been losing ground in this protracted and brutal conflict….”

Irish Prime Minister Simon Harris called the October 7 attack "barbaric" but added that "a two-state solution is the only way out of the generational cycles of violence, retaliation and resentment.”

Proving Israel’s take correct, Hamas said,

“These successive recognitions are the direct result of this brave resistance and the legendary steadfastness of the Palestinian people…. We believe this will be a turning point in the international position on the Palestinian issue.”