Stop looking at the fed, this is what you need to worry about
Summary
TLDRThe transcript covers a discussion between Jeff Snider and Steve Van Meter analyzing the Federal Reserve's flip-flopping messaging over recent months regarding the risks of inflation versus economic weakness. They argue the Fed seems unable to interpret economic data confidently, frequently reversing their stance, while bond markets steadily signal warnings of weakness. Underneath confusing data, they see signs of slowing real economy activity like falling retail sales and hiring freezes, which may indicate consumers are losing confidence, pulling back spending, and bracing for potential job losses. Overall the Fed appears reactive not proactive, while mainstream economic optimism contradicts signals of broadening global recession.
Takeaways
- 😕 The Fed seems unsure if inflation or economic weakness is the bigger threat
- 😮 The Fed's messaging has been inconsistent and confusing recently
- 🤔 The bond market seems to have a better read on the economy than the Fed
- 📉 Economic data suggests consumers are pulling back spending
- 🚫 The lack of hiring, not layoffs, is the biggest economic threat
- 😐 Consumers seem more pessimistic than the Fed's optimistic messaging
- 🤥 Central bankers tell people what they should be experiencing
- 😨 The Fed may worry it overtightened policy and caused damage
- 😄 Van Meter and the host have been consistent in their analysis
- 👀 Focus on actual economic trends, not Fed flip-flopping
Q & A
Why does the Fed seem to keep flip-flopping in their messaging about the economy?
-The Fed seems to react and change their messaging based on each new economic data point that comes out. If the data doesn't fit their expectations, they quickly change their stance on things like interest rates and inflation. This makes them appear indecisive and like they don't have a clear handle on the economic situation.
What is the bond market signaling that the Fed may be missing?
-The bond market has seen interest rates dropping recently. This could be a sign that financial conditions are tightening more than the Fed realizes and that there are growing problems in the underlying economy that the Fed isn't seeing.
Why might consumer spending be slowing down despite strong incomes and stock markets?
-Consumers may be worried about the lack of job creation and new hiring across the economy. Even those not directly impacted may be afraid of potential future income loss and pulling back spending as a precaution.
What is the biggest economic factor impacting consumer confidence right now?
-The biggest factor seems to be the sharp drop in hiring across the economy. This hiring freeze is making consumers worried about job security even if they personally haven't been impacted yet.
Is the Fed overestimating the potential for a rebound in consumer spending?
-Yes, it seems unlikely there will be a surge in pent-up consumer demand as policymakers are predicting. Consumers are more focused on the slowing economy and lack of hiring right now.
Why shouldn't people overreact to monthly data fluctuations?
-The Fed and analysts should focus more on overall economic trends rather than monthly ups and downs. Reacting too strongly to each data point makes policy seem inconsistent.
What signs are there that the Fed may have overtightened monetary policy?
-Comments from Fed officials about "overly restrictive" policy and the need to pull back rates suggest they have realized they went too far with rate hikes and tightening.
Does the Fed actually know what's going on in the economy?
-No, their constant shifting in positions shows they are largely reacting to data rather than having a firm grasp on where the economy is headed.
What should be the main economic focus right now rather than the Fed?
-The real economy - job growth, consumer spending, market trends. The Fed is struggling to interpret signals, so analysts should focus directly on economic fundamentals.
Has anything fundamentally changed to alter the economic trajectory?
-No, despite stock markets the underlying negative trends like global recession risk and U.S. hiring freezes are still firmly in place.
Outlines
😕 Fed flip-flops on policy stance
Paragraph 1 discusses the Federal Reserve's flip-flopping communication on monetary policy over the past few months. It points out how the Fed went from worrying about inflation to considering rate cuts to worrying about inflation again within a short timeframe. The paragraph argues this back and forth sends confusing signals to the public on the economic risks ahead.
📉 Bond market signals economy weakening
Paragraph 2 highlights how the bond market is indicating that financial conditions are tightening and something in the economy is not right, even as the Fed seems unable to interpret the data. It suggests the Fed's messaging does not match what bonds are signaling about economic weakness.
🚫 Hiring freeze sends chilling signal
Paragraph 3 talks about how the lack of hiring, not just layoffs, sends a chilling signal through the economy. It relates this to falling retail sales and consumer pullback in spending, as households worry about income and job security even without being directly impacted yet.
😕 Fed fiction of surging spending not believable
Paragraph 4 discusses the fiction created by policymakers of pent-up consumer demand leading to surging spending. It contrasts this with actual consumer pullback in spending, suggesting the Fed has overtightened policy but does not want to acknowledge a potential policy mistake.
Mindmap
Keywords
💡Federal Reserve
💡inflation
💡interest rates
💡rate hikes
💡Labor market
💡bond market
💡consumer prices
💡consumer spending
💡disinflation
💡recession
Highlights
The Fed keeps flip-flopping on whether inflation or economic weakness is the bigger threat
The Fed seems unable to interpret the economic data and communicate a clear message to the public
The Fed could just admit that inflation doesn't move in a straight line, but they don't seem to know where they stand
The Fed reacts to every data point rather than looking at the bigger picture
The bond market seems to understand the situation better than the confused Fed
Consumers may be pulling back spending despite stock markets being near record highs
Rising continued jobless claims may indicate households are worried about income and job security
The lack of hiring freezes, not just layoffs, sends a chill through the economy
Retail sales dropped even as incomes rose, suggesting precautionary consumer behavior
The Fed seems to rely on telling people what they should expect rather than actual effective policy
The Fed may have overtightened policy and now worries something might snap unexpectedly
The Fed's constant flip-flopping shows a lack of confidence despite public reassurances
The Fed is reacting like goldfish, stimulated by every data point that surprises them
The real economy continues slowly in the expected direction regardless of Fed flip-flops
Don't overanalyze Fed rhetoric - focus on real economic trends not monthly data fluctuations
Transcripts
back last December the Federal Reserve
was still afraid of inflation early in
December J Powell famously got on his
speech and said we are not talking about
rate hikes consumer prices are the
biggest threat to the economy fast
forward two weeks later at the fomc
meeting in the middle of December Powell
says suddenly yeah we're talking about
rate Cuts even in early January Federal
Reserve officials several of them talked
about quote overly restrictive policies
and their fears that maybe monetary
policy had grown too tight and therefore
was in danger of of causing real serious
damage to the real economy but then a
couple weeks after that the FED comes
back and says no we're now more afraid
about consumer prices all over again was
it oil was it the Red Sea who knows as
far as most people are concerned all
they can tell us the FED keeps going
back and forth back and forth with no
clear hand scandle on what the risk
might be no clear message to the public
are we in danger of more consumer prices
are we facing uh negative downside
pressure in terms of the real economy If
the Fed doesn't know how is anyone else
to know to help me make sense of what's
going on in the real economy forget the
FED because I know everybody wants to
focus on monetary policy but we're we're
more concerned about what is actually
happening on the ground than we are
about J Powell's ability to interpret
that and turn that into some kind of
useful message because message is the
actual policy so to help me do all this
to depher all of these back and forth
these the flip-flopping at the fomc
Steve Steve Van Meter what do you make
of this the inability the clear
inability of policy makers to come to a
conclusion and make it a clear
determination say we are this is exactly
what we see and we're confident this is
what we see and this is what we're going
to do about it instead they make a
determination then they change their
mind the next next week sometimes it's
that fast and then they go back again
you know Jeff this is like a tennis
match you're just going back and forth
back and forth kind of wondering where
the FED is at because it's really simple
they could just come out and say hey you
know what inflation doesn't go down in a
straight line which we know for an
absolute fact and they could say hey you
know what we believe we're in a
restrictive Zone and we would like to
pull back off of that because we really
believe that we've nailed this but we're
slightly concerned here so we're just
going to let the data fall where it may
we're going to let this thing run a
little longer and when we see it switch
down where this inflation is heading
toward our Target we'll pull back on the
rates a little bit and if it doesn't
maybe we'll stay here maybe we'll have
to raise but the problem I have Jeff is
they don't give us a clear message and
they can't even interpret the data right
they're getting now where they used to
look at this bigger picture of course
they were focused on the lag data As We
Know but now it's just likeoh what about
this report or that report here's
another one here's a pce CB it's like we
can't figure out where they're at
because the issue is they don't know
where they're at a lot of people believe
the FED really is all knowing they've
got all their economic models and
machines and computers and all these
people and here we're seeing in real
time they don't know in fact maybe
there's something going on that they're
actually afraid of of course we saw a
New York Community Bank have issues
maybe the FED is worried that's never a
good sign yeah I think that's part of
the issue here in fact that's maybe the
big issue is that if they were confident
at all in their interpretation or I mean
shouldn't they be confident in their
policies right they've had the most
aggressive rate hiking campaign in the
history of mankind at least that's how
it's told shouldn't that be enough
shouldn't they be say okay we're really
powerful we know what we're doing we
raised rates let it let the chips fall
where they may and we know where those
chips are going to fall because we
understand understand how the systems
work they're actually telling us by
flip-flopping back and forth they're
showing the public it's not what you say
it's what you do and what they say is
what they do and what they do is back
and forth all the time okay we're going
to raise rates we're not going to raise
rates we don't know how much rates we're
going to raise we don't really know
exactly how these things and as each
each individual data point comes out
they they don't I mean the CPI in
January was a perfect example it
surprised a lot of people for a couple
different reason reasons and apparently
it surprised the Federal Reserve too but
they should have looked at that and said
uh okay this happens as you're pointing
out Steve nothing ever goes in a
straight line so every once in a while
you'll get a month where the number will
be hot or it'll be cold and if you were
confident in your position and your
policy you would look past that and say
okay it's a one month fluctuation no big
deal the fact that the Federal Reserve
and policy makers react react in
response seemingly to every data point
that doesn't doesn't fit their their
straight line model is a clear signal
that they're just winging it they don't
really have a good idea on how anything
works let Al let alone what the
near-term future is going to look like
but something that does seem to know is
the bond market Jeff so today we get the
pce and lo and behold what happens
interest rates across the board are
dropping and you know the bond markets
telling the FED look you've no clue what
you're doing so if you're not going to
be the leader here which clearly they're
not the bond market Market's telling
them look you can forget these oneoff
you know monthly reports what we know is
that Financial conditions are tightening
here which is key A lot of people
understand that lower rates mean things
are getting worse not actually better in
the underlying economy so we looked at
the bond market here and say hey wait a
minute it's clearly telling us that
something isn't right that the FED is
not seeing or maybe the FED knows but
doesn't want to talk about it whatever
the case is Jeff it's the bond market
that's got this right yeah we always
look to the yield curve as for not just
clues about the near-term but really the
longer term probabilities there and as
you pointed out I mean bonds have been
telling us all along regardless of the
individual monthly CPI reports that this
was the direction the economy was going
to take it was going to become
disinflationary even if it would to even
if it would take a little bit longer
than maybe people were hoping for and so
that was always the background and so
the question was how does the economy
become disinflationary doesn't just
doesn't just the Consumer Price numbers
don't just magically start to go down
there has to be Economic Consequences
behind the change in numbers which is
where we get into this to this debate
about okay what is what does
disinflation actually mean is it a
goldilock soft Landing or is there more
behind it is there recession is there
deflationary potential maybe lurking
behind the economic changes that we see
going on right now because that's that's
another thing that keeps coming up uh
despite the January CPI around the rest
of the world too this inflation has
become more and more entrenched over the
last several months of last year and it
looks like to begin this year and we've
also seen I know you talk about this too
Steve um indications that even us
consumers maybe have started to pull
back here we just got some figures today
on personal consumption and uh incomes
and incomes went up with the cost of
living adjustment from the federal
government but spending did not and so
you have to wonder if part of the
disinflation
is even in the the United States where
the economy is absolutely booming so to
so we're told maybe consumers have
gotten to the point where they're even
as income was added from the federal
government they're kind of sitting back
and saying well maybe we're not going to
spend it uh that's that's more and more
signals not just in the US but around
the world that things really did change
around October November into the last
part of last year well and then there
comes a question Jeff is what are
consumers seeing that perhaps we not you
know seeing at the FED level why are why
is a Fed flip floppy here is it
something they really see or they just
don't know the question now is if
consumers aren't outspending against the
fact that the US Equity markets are
sitting right near or at all-time highs
that doesn't make sense because usually
that's a great parameter the wealth
effect gets people feeling very
confident so as we look underneath what
do we have an issue with the labor
market starting to break and we see that
going on around the world here in the US
what would gets a household really
worried well the fact that continued
claims now are back uh near or at 1.95
million it's at
45,000 from last week so if indeed we
had this strong labor market effect and
people are feeling optimistic we should
see that continued claims number
dropping a lot to going more in line
with the initial claims data that still
hasn't picked up all these announced
layoffs yet so my hunch here is that
households are starting to realize that
yeah you know what someone in our
household lost their job or income went
down but they're unable to find another
job or maybe they're going on interviews
and they're being told hey you know what
we're we're interviewing but we're not
hiring and that starts to get in the
psyche of people and deal comes back
right to how they spend and how they're
handling their money I think that's the
worst part of all of this it's not
necessarily the layoffs the biggest the
biggest factor in basically every part
of the economy and that setback the
disinflation everything else is the lack
of hiring regardless of layoffs and
firing because there's all sorts of data
discrepancies and Deb I mean we know
there's layoffs happening yet they don't
show up an initial claim so let's but
let's set that aside you know we do know
with reasonable Assurance even from
initial claims even from government
statistics on the labor market that
hiring has absolutely plummeted it has
plummeted in a way that we haven't seen
outside of serious re session and we
hear all of these mainstream media
stories anecdotes if you talk to people
who are in the economy even if they
haven't been laid off they are defitely
afraid of that possibility because they
know if they do get let go or they do
get their hours cut they have no
alternative there's nowhere else to go
so in that situation you don't even have
to be laid off you don't even have to
have your hours cut just the threat of
that happening you start pulling back
and saying maybe I'm not maybe I won't
buy that extra thing I wanted to buy
because I might need to save for rent
next month I don't know if I'm going to
have the same amount of hours or if I'm
even going to have a job that kind of
that kind of of really hiring freeze
just sends a chill throughout the entire
economy and so you get the numbers from
the pce uh the B the Bea this month for
January where incomes were up again the
cost of living increases but spending we
saw retail sales I know you talked about
this Steve retail sales were down down
sharply in January despite an increase
in income suggesting I know economists
blamed it on the cold weather which he
just have to let but it suggests that
consumers are saying okay regardless of
the layoff situation or firing no one is
hiring and the only people who are
hiring are what Leisure and Hospitality
so you have a nice job and if you do get
fired or let you know get get your hours
cut or something happens the only
alternative you got no no chance of
getting a moving laterally to the same
type of job you have to you have to set
you you get set way back and and become
a a bartender or waiter or something
like that it's just that's the kind of
situation that can really create some
some setbacks in the overall economy you
know it's it's really interesting Jeff
you mentioned retail sales because in
the same month hours work dropped retail
sales dropped so I think it's really
interesting because you know you you
mentioned what's going on in the minds
of these workers it's really you know
you start thinking you go to work every
day and what are you seeing the number
of backlogs those orders that are been
on the books for a while they're not a
priority they keep going lower and lower
and so you think well where's the new
orders well they're not coming in in a
big way either and you start to realize
if you're a worker then wait a minute
once we get through all these backlogs
I'm not needed and in fact what are we
seeing in the regional fed data we're
seeing some you know mentions that hours
are being cut or if work doesn't pick up
hours are going to be cut and then that
all starts to materialize back to retail
sales as consumers are now saying wait a
minute maybe this soft Landing or no
Landing scenario isn't going to play out
if it does great but maybe I need to
start setting some money aside here then
what do we see of course personal
income's up but spending doesn't match
that's pretty unusual here so to me I
think that's what's going on is
consumers have a much better pulse of
what's going on in the real economy then
of course the Federal Reserve gu which
just raises the question what is it that
J Powell is suddenly afraid of in terms
of um you know recent statistics and
it's not just consumer prices I mean
he's mentioned GDP he's mentioned
payrolls too but it seems like he's
picking all the good numbers whether he
actually believes them or not it sounds
like he's saying that everybody else
will believe them and everybody else
will buy into the hot economy we see
this in Japan I don't know how I know
you follow Japan pretty closely too the
Japanese are saying saying yes we see
that the Japanese economy is in
recession right now but we believe we
choose to believe that consumer spending
is going to Surge in 2024 because of
this pent up demand over the last couple
years consumers are just going to let it
fly at some point even though the
economy is in recession right now and
consumer sentiment is in the dumps it's
we heard the same thing last year in
China remember uh consumers so much pend
up demand after all the lockdowns in the
previous year Chinese consumers were
going to come rushing in and the Chinese
economy wasn't just going to explode
higher last year it was going to save
the entire global economy and create
inflation it's almost as if it's almost
as if policy makers around the world
including the Federal Reserve have
created this fiction where consumers are
just going to start spending for
whatever reasons and that will lead to
another round of inflation pressures and
unless we do everything in our limited
power to stamp that out before it gets
started they're constantly afraid that
consumer spending is just going to
Skyrocket and surge for for whatever
reason but Jeff I think you just nailed
it the real power of these political
leads the central Bankers isn't actual
policy it's telling people what they
should be experiencing so if you get out
and tell people look spending's going to
go up you need to go do this before
prices get higher well then that people
will maybe react and go do that and that
will continue to drive the economy the
problem is when you see them come out
and say look we really believe all these
things are going to happen and we hope
you believe with us because that's
really important that you go out and
spend money well when the consumers
don't believe it then you get the
situation where the central Bankers look
like complete idiots and then they have
to start to maybe wonder is that the
real reason PO is flip flopping back and
forth on practically you know every two
week basis because he's telling people
look the economy's got this not Landing
I was just on 60 Minutes did you not go
hear me and I hear what I said I did The
Impossible and why aren't you outs
spending and matching this I think maybe
there's some you know deep underlying
issue here that the FED really knows
something's wrong but in typical fashion
they don't know what it actually
is well you have to wonder if that's I
mean if they if they overreacted to
their own overreaction right because
they seem to embrace low interest rates
and then some people started to ask okay
wait a minute why did the FED just
U-turn and suddenly Embrace low interest
is there something wrong in commercial
real estate she'll be worried about
Banking and so maybe the FED worried
that they created an overreaction and
now try to walk it back and say oh no no
no no the economy is doing really well
in fact the econom is doing so well
we're actually more concerned about
consumer prices but I I think that may
be giving them a little bit too much
credit don't you Steve because they
would then have to be we we would have
to imagine a situation where they're
actually on top of all of these things
rather than just simply blowing in the
breeze as each new additional data point
comes back comes in and if it's not
exactly what they were expecting then
they got to react to it and change their
entire tune and then another data point
comes in they got to react to that and
change their tune back in the other
direction I think that's that's really
what's what's happening here but that in
of itself is indicative if you have
faith in the soft landing and no landing
and goldilock scenario you don't need to
change your tune back and forth every
couple weeks you just say look this
thing is going to happen and if the CPI
is a little hot or the payroll reports a
little soft who cares the next one will
be just perfect if you actually believed
any of that you wouldn't need to to
undertake this flip-flopping this
dramatic flip flocking flip-flopping in
such a short period of time that's why
you know you and I we've been consistent
in our message all along and when you
step back and look at the big picture
everything continues to develop just as
we expected you you you don't pay
attention to the monthly fluctuations
you look at the trends you look at the
Marketplace as you pointed out earlier
has anything materially changed in the
trend in the economy the global economy
too as we see more countries slide into
recession has anything changed in the
marketplace stock market notwithstanding
of course and that's where you look for
analysis you don't need to overanalyze
every variation and
fluctuation no you don't but if you're
concerned and we see this at prior peaks
in the federal funds that there's this
great confidence that we've done the
impossible we're doing it and then
something of course unexpected shows up
and next thing you know the economy is
into a recession Financial crises
whatever the situation is and The fed's
Cutting maybe this is just simply the
case Jeff that we've heard from pal that
they went too far and their own mind
that they overtighten to really restrain
inflation maybe there's something they
see maybe they're just worried just
because they have nothing better to do
that they did over Titan and that's what
the issue is they want to look really
good to the public but they're now
afraid that something that they didn't
see is going to snap and break and
they're going to miss it maybe that's
maybe it's just something that simple or
maybe they're crazy well I think the the
the bottom line here Steve is that
everything at the FED is unexpected so
what we're really saying is maybe maybe
not put too much stock in what they're
doing what they're saying or what
they're seeing because they're just
reacting to everything they're sort of
like goldfish swimming around and every
little stimuli they have to move back
and forth to so the Federal Reserve okay
everybody wants to pay attention to the
FED because we're told you have to pay
attention to the FED when the FED
eventually has to come to grips with
what's happening in the real economy and
that's the stuff that we need to be
focused on and that's the stuff we look
at in 2024 that continues to move in
that same direction however slowly and
incrementally
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