Stop looking at the fed, this is what you need to worry about

Summary

The 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

00:00

😕 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.

05:03

📉 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.

10:05

🚫 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.

15:06

😕 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.

Keywords

💡Federal Reserve

The central bank of the United States. In the video, there is a lot of discussion around the Federal Reserve's changing stance on interest rates and inflation over the past few months. This flip-flopping signals they may not have a strong grasp on the state of the economy.

💡inflation

A rise in the general level of prices for goods and services. The video discusses how the Fed has gone back and forth between worrying about high inflation and then about disinflation and negative impacts on the real economy.

💡interest rates

The cost of borrowing money. The Fed raises and lowers interest rates to try to control inflation. The video critiques this approach and the Fed's lack of consistency around their interest rate policy.

💡rate hikes

Increases in interest rates. Powell and the Fed were initially adamant about raising rates to fight inflation, then suddenly shifted and talked about rate cuts, showing inconsistency.

💡Labor market

The job market and employment level in the economy. There are indications that the labor market is weakening with a hiring freeze and rise in continued jobless claims, concerning consumers.

💡bond market

The marketplace where bonds are traded. The video states the bond market seems to have a better sense of economic conditions than the confused Fed.

💡consumer prices

The prices paid by consumers for retail goods and services. The Fed seems to alternate between worry about inflation in consumer prices versus downside risks of an economic slowdown.

💡consumer spending

The amount spent by consumers on goods and services. Policymakers expect strong consumer spending but recent data shows spending dropping as consumers grow cautious.

💡disinflation

A slowing of inflation rate over time. The Fed shows confusion even as disinflation emerges, not recognizing recession risks.

💡recession

A significant economic decline. The video warns policymakers are ignoring signs more countries are sliding into recession globally.

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