If you haven’t noticed, I am using these first few articles here at GTC Traders to … well … rant. For some time, a few things have been bothering me. And … well … I’m getting it off my chest now.
So by now, as we all know … last week the Fed raised their target interest rate policy again in an effort to battle the ongoing inflation problem. They raised the Fed Funds Effective Target by 0.25, or 25 Basis Points.
Ok.
First of all? As I was saying in the article on Inflation, I have been in the High Inflation camp since February of 2021. I knew it was not “transitory”. And at the time I told ones with whom I traded (and others), the Fed was going to need to be extremely aggressive.
Wellll …. as we now know? The Fed was not aggressive. They stated several times that they did not want to raise the rate ‘too much’ or ‘too soon’. They did not want to raise the target rate by 75 basis points (I actually thought they should raise the rate 100 basis points, or perhaps even 150 basis points). And their slow movement on rate hikes, has been a mistake. I knew it was a mistake. I said it was a mistake. I was not alone. Others were saying it was a mistake. Mohamed Aly El-Erian, the President of Queens College of Cambridge and the CEA of the corporate parent of PIMCO was saying the exact same thing. The Fed was making a massive policy error (again), by ‘limping in’ to the Inflationary environment. It would be too little, too late. What would ensue, would be “a game of catch-up”. And this risked causing the volatility in Inflationary environments that we saw in the 1970’s.
No matter. They repeated the same mistake they made then.
The “Inflation is Transitory” crowd was wrong. The “no further hikes needed” crowd was wrong. And yes, this is my victory lap.
But that’s simply my first point.
The second thing that really bothers me? Is … as again … as I was saying in the Banking Crisis article, for eight years … from 2008 to 2016 the Fed told us all …. over and over again … that they could not raise the rate by 25 Basis Points. That a measily 25 Basis Points, would be ‘too much’ …. ‘too fast’. They didn’t want to ‘risk deflation’, and cause ‘instability’ in world markets. The Fed constantly warned us that 25 BPS was ‘too much’. At that time, I was not worried about inflation. From 2008 to 2016, inflation was not an issue. And I was correct (again). As I said in that article this policy bias was a massive mistake; as the actual risk was myriads of Policy distortions, creeping into the economy. That was the issue. For which we are now paying the price as those distortions ‘come home to roost’ as it were.
But the time aspect …. eight years of inaction … is only part of what irks me. As I intoned above, in the grand scheme of things … 0.25% is next to nothing. That we were told 0.25% would be ‘too much’ in 2013. That is what bothers me. True, that was a different macro-economic environment. I would argue, a much stronger economy. However, the point remains, and it’s a point that many made in those eight years. 25 BPS is next to nothing. We’ve been lighting off 50 BPS rate increases like it’s the fourth of July for a year solid now. And in the STIRs market? Rates have been known to move around by … let’s say 30 basis points, in 90 day markets. This B A R E L Y makes news. If it’s the first red in 90 day interest rate markets? There’s no mention of it at all, and it’s routine movement. Not only are we still seeing inflationary problems? But this is far, far more, than the 25 basis points we were asking for in 2013.
So let’s back up a bit. I guess … that the 25 BPS we were asking for in 2013? I guess that wouldn’t have been the end of the world after all, would it guys? For those eight years rates were kept near 0%, and micro distortions started to multiply and propogate throughout the economy … 25 basis points really wouldn’t have been that big of a deal in 2013? No deflation apocalypse? In fact, maybe we could have avoided those policy distortions from entering the economy in the first place?
Almost … almost like this entire mess could have been avoided?
