Going into the March FOMC meeting, the market was very well prepared for a dovish tilt from the Fed, especially as their official forecast still called for two more rate hikes in 2019, whereas the market had already moved to discount no hikes this year -- and a chance of a cut even in 2019.
There was a big disconnect between official Fed testimony and what was being implied across asset markets, so there was a desperate need to meet "consensus." As expected, Powell's aggressively dovish guidance dropped the dot plots to show no further rate hikes this year and only one hike in 2020.
Call me a cynic, but isn't it the Fed's job to "guide" the market, rather than just "track" it? All in all, it was quite a pathetic display of a really clueless Fed, each member scared to be responsible for popping the credit bubble that has been going on since 2009.
What is rather shocking, if not confusing, is that Powell opened his speech by saying that the outlook is solid and economy good, but then took all the rate hike expectations down to 0. Seems bizarre and outside rational logic.
The truth is they don't know and are too scared to see the market drop. It is not a matter of if, just when. The least they could do is remove accommodation, free up the balance sheet, so that when the next recession comes, they have more wiggle room. If the economy is so "solid," and S&P 500 back at 2820 -- about 3% off all time-highs -- why the change in tact now when just three months ago, they were in full throttle rate increase mode. Jerome Powell, who was once labelled as "Superman" Powell, has lost all credibility, in my books. He is yet another puppet of the markets and U.S. administration.
On the topic of balance sheet normalization, the Fed said the unwind will start in May and be completed by the end of September -- and will reinvest MBS across the U.S. Treasury curve, not only in the front part of the curve. According to Bank of America, the Fed's balance sheet will end at $3.76 trillion, with $1.22 trillion in reserves. At the peak of the crisis, the balance sheet stood at $4.5 trillion and just under $1 trillion prior to the Global Financial Crisis.
The biggest question (rather worry) for investors is why is the Fed being so incredibly patient. What do they know or fear that the market is not aware of. Clearly equities did not get that memo, as they seem bent on reaching new highs without understanding or questioning the reason behind it.
The market reaction says it all. This was a dovish statement. The dollar fell aggressively, bonds rallied and equities rallied. It was a textbook knee jerk reaction. The machines are not cerebral, they follow trends like monkeys. The bond market is in total disarray, as the 10-year yields tumbled and with curve inversions seen across the front end of the curve. This is not a healthy market.
The fact of the matter is that if all the "accommodative" dovish policy is priced in, markets are running out of steam. The macro data is weak and shows no signs of picking up, but we are trading as though GDP growth is back to trend.
The truth revealed itself following the FOMC press conference when the S&P 500 market u-turned and went into the red for the day. Boohoo to the Fed, and this is, after all, the most dovish and supportive commentary they could possibly give.
The algorithms are all long as they feel trend is intact above 2800. Let's wait and see, as we are now threatening the 2800 level once again. If we breach it, rest assured, these algos will turn to sell mode and wallop the market back down aggressively.
The equity market is massively overpriced and there are some serious recession risks looming with a Fed that is backed into a corner as markets are back to all-time highs. Only a selloff can justify Quantitating Easing 4, as surely it would be career suicide to do so now at the market top.
Will You Have Enough Money to Retire?
Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert "Mr. Retirement" Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.