For the first time since the Federal Reserve started raising interest rates about a year and a half ago, we are headed into a new F.O.M.C. meeting where Jerome Powell and Company might not tighten monetary policy further. Indeed, there has not been an F.O.M.C. meeting along the way of this tightening cycle, to this point, where the outcome really is in some doubt and a “game day” decision might surprise some people come Wednesday afternoon.

The consensus–if you can even call it that–is calling for a “hawkish skip” where the Fed stands pat but suggests it is still not done. As I explained a few times of late, I think Powell will be loathe to use the word “pause” which is why “skip” is now emerging as a favorite word (after all, I’m sure he knows that if computer algorithms pick up too much on a too-often used “pause” come Wednesday there will be an added boost to asset prices/animal spirits, which will complicate the Fed’s job in reining in inflation.)

So as we head into a “Fed week” arguably more pivotal than any over the last 18 months, let’s go back and remember 1. How we got here, 2. The Fed’s lingering “higher for longer” mantra and 3. What the risks are now of the Fed making a mistake one way or the other.

It must always be remembered that–even before the COVID Plannedemic really gave the Fed and other central banks the cause to create new money with unprecedented abandon–Powell had actually in the Fall of 2019 suddenly discovered a “plumbing problem” in the U.S. financial system, as he euphemistically put it. Addressing those stresses at the time, worries of an economy petering out again even before the self-inflicted recession of 2020-2021 and the like, Powell started shoveling hundreds of billions of dollars into the banking system.

Then came that Plannedemic…and a money-printing orgy that would make Weimar Germany blush. Leading most other central banks in similar actions, the arsonist Jay Powell created something on the order of 30% of ALL the U.S. dollars that had EVER been brought into being…IN TWO YEARS!

Yet, he continued telling the world that the inflation rates in both producer and consumer prices that were beginning to rage was an aberration…and he and others, dutifully, introduced us to a popular new Fedspeak term, transitory.

The months went by on the way to the highest consumer price increases in some four decades. Still, Powell went an exceptionally long time in telling us it was all a figment of our imaginations and that the Fed was not “behind the curve” in, at least, starting to talk more about inflation maybe being real.

Finally, everyone…their dog…and the fleas on the dog knew what Powell himself was finally acknowledging: inflation was real, raging and a problem. But as usual, it was the fault of forces other than the Fed (which WAS the proximate cause of it all as a matter of simple mathematics.)

As 2022 commenced, the Powell Fed was finally prepping the markets for the start of a new tightening cycle to VERY belatedly try to make up for the inflation mess it had made.

So abrupt was this “180” however–and so suddenly resolved was Powell to right this wrong of his even at the risk of a recession and more–that some started worrying along the way whether he was overdoing it in the other direction. Sure, we belatedly needed a fireman rather than an arsonist; but would “Fire Marshall Jay,” as I dubbed him, go too far and destroy some things?

But while a few banks have needed to be “rescued” in the recent past and other over-levered parts of the markets arguably remain accidents waiting to happen, Fire Marshall Jay hasn’t done too much damage…at least, not yet. While Europe’s “anchor” Germany is officially in recession, the U.S. economy remains substantially stronger than anyone would have predicted 18 months ago would be the case…and after 500 basis points’ worth of rate hikes, no less.

Most worryingly for the Fed, the stock market was reported last week to be in “a new bull market.” This is plainly NOT part of what the Fed had in mind as a result of this tightening cycle, and will no doubt earn some debate at the Eccles Building starting tomorrow.

A frothy stock market and resilient economy are but a couple of the issues for a Fed that has insisted all along it wants to reduce demand as a part of bringing core inflation back down to its purported 2% target. But a big part of the problem also is that–for half or more of this now 18-month tightening process–the markets have refused to take the Fed seriously.

If for no reason other than that–with the markets and economy still holding up AND with core inflation stuck very near 5%–the Fed has ample room and reason to hike this week. Powell likely would rather not risk even more encouragement of still-high inflation and that much more renewed idiocy/speculation on Wall Street with a skip or a pause…but we’ll see.

Bear in mind that Powell has promised repeatedly not to do what Arthur Burns did back in the 1970’s…and what the Reserve Bank of Australia and Bank of Canada just did, albeit to lesser (so far) extents.

And that is, stop/pause rate hikes before the job is done only to have to re-start them later.

The RBA hiked rates for a second time in succession last week after pausing in April. The BOC likewise started hiking again last week. Both of them admitted, effectively, a mistake in misreading how sticky inflation still is…AND each warned that further rate hikes are likely.

Powell still faces the reality that some other central banks are fighting his efforts; notably, both the Bank of Japan and, in a suddenly bigger way, the Peoples Bank of China. That complicates things, all else being equal.

Further, the point WILL still come when it’s not just one bank here and one there that topple as a hyper-leveraged financial system starts to feel even more the Fed’s “higher for longer” medicine. The risk of pulling out one too many sticks from its Jenga game remains, even if–by most appearances–there still is some ability and need to keep playing.

To be sure, what we hear from Fire Marshall Jay and his band on Wednesday is likely to have an even more outsized impact on markets than usual. That is largely because–even though there is the sense that this next move (or non-move) is a coin toss right up until Wednesday afternoon (and given some late-breaking new rounds of inflation data about to come out)–the stock market, for one, is betting that Powell is going to cave first.

On the flip side, most commodities anew–and certainly the average equities there–have been betting as if we are already in recession, etc. For some of these themes, powerful rallies (and ones based FAR more on fundamentals than we’ve seen with A.I. stocks and the like lately) could unfold, especially for crude oil. We would welcome that to a great extent, to be sure. However, this would greatly increase the chances that the Fed would have to re-start rate hikes after a skip or two.

Needless to say–and as I quipped during our podcast wrapping up last week (RIGHT HERE if you missed it)–I’ll have my beer and snacks at the ready come 2:00 p.m. Wednesday…and will be passing on to our Members any needed changes in our portfolio mix.

Finally, a couple more especially good graphics below from my weekend reading/research that epitomize just how conflicted the Fed is this week.

All the best,

Chris Temple

Editor/Publisher

Don’t forget that you can follow my thoughts, focus and all pretty much daily ! ! !

* On Twitter, at https://twitter.com/NatInvestor

* On Facebook at https://www.facebook.com/TheNationalInvestor

* On Linked In at https://www.linkedin.com/in/chris-temple-1a482020/

* On my You Tube channel, at https://www.youtube.com/c/ChrisTemple (MAKE SURE TO SUBSCRIBE!)

* Every Friday evening w/ Mickey Fulp on the Metals, Money and Markets Weekly at https://www.kitco.com/