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\\nThe Fed\'s Game of Chicken
\\nThe big news was yesterday, when Fed Chairman, Jerome Powell, basically flinched. I\'ve been talking about the game of chicken that the Federal Reserve has been playing with the markets. The way the game of chicken goes, is the markets keep moving lower and the Fed keeps talking about how great the economy is and how many rate hikes are coming in the future. Somebody has to flinch - somebody has to blink. It\'s like you have these two automobiles driving toward each other, and there\'s going to be a major crash unless somebody turns the wheel.It seems like it was Jerome Powell who turned the wheel first, and, in fact, was chicken.
\\nThe Fed Is Worried About All Asset Prices, Not Just the Stock Market
\\nAs much as the Fed wants to pretend they don\'t care about the stock market - they absolutely care about the stock market. They are tremendously worried about a weakening stock market.\\xa0 Remember the goal of quantitative easing was to lift the stock market - to create a wealth effect and it was that stock market-created wealth that was going to drive consumption and the economy. And it wasn\'t just the stock market; it was also the real estate market.\\xa0 So the Fed is worried about all asset prices, not just the stock market.\\xa0 Clearly the real estate market is in even more trouble than the stock market, but both of these markets were headed lower, and I think that is what really prompted the Fed to blink - to swerve in this game of chicken.
\\nPowell Suddenly Dials Back the Narrative
\\nNow, of course you also had President Trump pressuring the Fed, you had\\xa0Mnuchin putting some pressure on the Fed, which I think should also be a worrying factor.\\xa0 We don\'t really know. There was a lot of speculation about what was behind the Fed\'s change of heart - change in policy.\\xa0 After all, up until yesterday, even when you had the Vice Chair speak, the tone was very hawkish: "Yep, we\'ve got lots of rate hikes coming." And now all of a sudden, Powell dials it all back.\\xa0 Basically, what Powell said that convinced people that maybe there will not be as many rate hikes in the future, is, "We\'re just below neutral. We\'re almost there, maybe one more rate hike ought to do it."
\\nIs 2.25% to 2.5% Neutral?
\\nFirst of all, we\'re still at 2%, so that would imply neutral is 2.25% or 2.5%. That really shows you how low the neutrality bar has been lowered given the enormity of the debt bubble that have.\\xa0 Once upon a time, and not too long ago, a 2.5% Fed Funds rate would have been considered highly stimulative.
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