The Volcker Moment

After the March FOMC when Powell reaffirmed three rate cuts in 2024, I said that J. Powell is now one hotter-than-expected inflation report away from losing all credibility. Consider it lost. And Wall Street analyst credibility is under the bus as well. This is their dick in hand moment.

Rewind to March:

March 25th, 2024: Dovish Powell Keeps The Music Playing

"Financial markets cheered the news from last week’s Federal Reserve (Fed) meeting, reaffirming the expectation for three interest rate cuts this year.1 The S&P 500 Index notched its 20th all-time closing high Thursday while Treasury yields moved lower across the curve.2 Fed Chair Jerome Powell somewhat dismissed the recent uptick in inflation as a “sometimes bumpy road toward 2%.”

This is the biggest rope-a-dope in human history.

After last week's larger than expected jobs print, the stock market remained sanguine on the belief that only J. Powell's recent rate cut assurances matter. However, today we got another hotter than expected CPI and this time stocks are tanking because markets now know that they can no longer believe J. Powell. The market imputed odds of a Fed rate cut in 2024 has gone from seven expected rate cuts at the start of this year, to 50% odds of ONE rate cut by the end of the year.

Powell has made the exact same mistake Paul Volcker made in the early 1980s - he pivoted to an easing stance too soon. And now inflation is starting to rise again. Back in the early 1980s when inflation re-accelerated, the Volcker Fed was forced to begin raising rates again, which pushed the economy into deep recession and unemployment to 10%. Not to mention the housing market was obliterated. In retrospect, Volcker is remembered as a tough guy on inflation, but at the time he was excoriated.

Speaking of the housing market, what is particularly disturbing about this inflation report is that the Fed itself is the primary cause of inflation, and of course I am referring to housing costs. Not only is the Fed stoking the housing bubble with their still-bloated balance sheet, but they are also raising mortgage costs at the same time. Which means the Fed is driving the total cost of housing higher which feeds back into the CPI via what's called "owner equivalent rent", which is skyrocketing as we see in the chart below. And therefore the Fed itself is forcing rates to remain too high for too long - trapped in a doom loop of their own making.

The cost of owning a home is off the chart relative to the historical baseline.

In summary, markets are just now starting to price in the new reality of higher for longer.

Better never than late.