Markets to Fed: “Stop talking nonsense”

A James Alexander/Marcus Nunes post

The FOMC statement today clearly tried hard to tell the market that the economy was improving,  signaling the “door is open for a September hike”!

“The labor market has “strengthened,” the Federal Open Market Committee said after its two-day meeting. That was brighter than the FOMC’s assessment six weeks ago, when the central bank said the pace of improvement in jobs growth had “slowed.” Moreover, officials described household spending as having been “growing strongly,” and economic activity as expanding at “a moderate rate.” That marked a mild upgrade from June, when the Fed said household spending had strengthened and economic activity appeared to have picked up.”

But … since mid-2014, the Fed’s own Change in Labor Market Conditions is still weakening, if a bit less than earlier in the year. Household spending in nominal terms is still awful, even if lowflation means real spending looks OK. NGDP growth is also sliding down. We know that money illusion means people certainly won’t feel better and low nominal growth does no favors  to productivity growth. The Price Pressures probability, calculated by the St Louis Fed, also shows price pressure is absent.

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Today’s FOMC statement followed on from the transparent spinning we spotted last week by the Fedborg.

In fact, three bits of data that came out today were all weaker than expected all in different areas of the economy: durable goods, pending home sales and stronger oil inventories. A “moderate rate” of expansion is just plain wrong.

The markets certainly reacted quickly, first seeing a rise in the USD and bond yields before shock kicked in that the Fed had lost touch with reality and both the USD and bond yields fell. Technically the first impact is the liquidity impact of tighter money followed by the Fisher effect of longer term expectations driving prices.

The feedback loop we identified  in monetary policy seems to be working very quickly these days, hours, minutes. In fact, it is on the way to collapsing to a single point: “Whatever the FOMC says, there will be no tightening”!

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