Did the Fed Blow It?

The doves are up in arms, incensed that the Fed would dare raise rates (and more to come!) in the midst of an economic downturn.  Never mind that most of these doves were the ones pounding the table last week about how wonderful the economy is.

Are they right?  Yes.  And, no.  Here’s why.

When the Fed first started talking about needing to aggressively raise rates, inflation was a problem.  Interest rates were spiking higher which, with $22 trillion in debt and a massive budget deficit, would sink the economy that much faster.

But, the White House got the message and started working to push inflation lower.  First came the tweets, which didn’t help at all.  These were no doubt followed by back room negotiations, which also didn’t help.

Finally, Jamal Khashoggi had the bad fortune to be butchered by the Saudis.  In the face of international outrage, Trump finally had some leverage. He could protect MBS and friends; but, it would cost them.  Beginning the very day that Khashoggi was killed, WTI and RB plunged over 40%. CPI followed suit, but not in time. Because the YoY delta in gas prices will be negative in December, CPI might very well decline below 2%.  But, it won’t be reported until January.It was enough to make the Fed eliminate one 2019 rate hike, but not enough to forestall yesterday’s rate hike or assuage the doves regarding the path forward.

If CPI comes in at 1.9% in January, the Fed can say “look, no more rate hikes for a while ’cause we’re data dependent.”  The doves will love that.  But, it’s too late for 2018.

On another note, I heard someone on CNBC this morning say that it was wonderful that the US dollar was declining, as if this was a good thing for the markets.  Obviously, this person doesn’t look at charts, or at least the USDJPY chart.

As expected, the pair is plunging toward its SMA200 — with the usual impact on stocks.

More bad news for bulls: VIX, which has toyed since Oct 11 with a fan line off its Feb highs, is seemingly breaking out.

Our downside targets remain unchanged.

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