By Michael O’Neill
The autumnal equinox has arrived. If you live in some regions of Brazil, Ecuador, Columbia or ten other countries and look skyward, on September 22, the sun was directly above the equator, equally dividing day and night.
There is no equal division at the Fed. After reading the September 22 FOMC statement and listening to Fed Chair Powell’s press conference, you know the Committee has set the table for higher interest rates.
Analysts predicting the Fed would refrain from making a tapering announcement at this meeting were correct, sort of. Although the Fed left the pace of asset purchases unchanged, they said “a moderation in the pace of asset purchases may soon be warranted.” That is like painting a target on November.
That doesn’t mean interest rates are going higher any time soon. Mr Powell went to great lengths to explain to reporters that the threshold to tighten policy is far higher than the one to begin reducing QE purchases.
His colleagues on the Committee beg to differ. The dot-plot projections point to a rate hike in 2022, far sooner than the June projection.
Markets tend to react to changes in the dot-plot projections like they are gospel despite Chair Powell’s assertion to the contrary. In June, he said “The dots are not a great forecaster of future rate moves and it’s just because it’s so highly uncertain,” adding that they should be taken with a “large grain of salt.” That suggests the 1960’s comic “Little Dot” and the FOMC “dot-plot” are equally accurate interest rate barometers
Post-FOMC meeting uncertainty rapidly faded as global markets took the news in its stride. Risk sentiment improved, equity markets rallied, and the US dollar retreated.
But why should you believe anything the Fed says? It’s not like the Committee members are paragons of virtue. Far from it.
The Wall Street Journal reported that Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren were active in stock and other investment markets. Neither are voting members of the FOMC, but they are active participants in monetary policy discussions. You can’t get any more “insider” than that, and insider trading is reportedly illegal.
Ask Martha Stewart. She served five months in a minimum-security federal correctional facility and another five months of house arrest. Prosecutors tried to nail her for insider trading but didn’t have a case, so they charged her with conspiracy, obstruction of justice, and making false statements.
Photo: Pixabay/IFXA ltd
There is a lengthy list of nefarious investors convicted of insider trading. Notable among them is Raj Rajaratnam, the founder of Galleon Investments was convicted of insider trading in 2011 and sentenced to 11 years in jail (served 8) and fined over $150 million. The man still has $1.3-$1.8 billion proving white-collar crime pays and pays big!
Those expecting Kaplan or Rosengren to suffer any penalties will be sorely disappointed.
Fed Chair Powell dodged the issue when questioned during The September 22 press conference. He said” We understand very well that the trust of the American people is essential for us to effectively carry out our mission. That is why I directed the Fed to begin a comprehensive review of the ethics around permissible financial holdings and activity.”
Seriously? It’s 2021, and the Fed just discovered that having policymakers trade for their own account may be unethical.
A lack of integrity at the top of the food chain is rather common.
The World Bank was forced to discontinue its Ease of Doing Business Report (EODB) after China used its influence (cash maybe?) to get officials to manipulate data in 2017, to avoid China slipping in the rankings. Timothy Ash, Senior Sovereign Strategist at Bluebay Asset Management wrote in a letter to the Financial Times:
“The report is a critical component in how financial institutions and rating agencies assess country risk and now environmental, social and governance performance.”
Even more concerning, the CEO of the World Bank Group during the EODB debacle is now the head of the International Monetary Fund (IMF).
Closer to home, Prime Minister Justin Trudeau is the only Prime Minister in history to be twice censured for ethics violations.
Mercury Records recording artist Rush said it best forty-four years ago
“And the men who hold high places, must be the ones to start, to mold a new reality, closer to the heart.”
Fed Chair Jerome Powell may be a Rush fan. He is not ethically challenged like a few of his colleagues. He took his role seriously and avoided trading in his personal account. He also agreed that the time to taper QE purchases was fast approaching but was more cautious about the prospect of raising interest rates.
Nevertheless, the era of ultra-low rates is on life-support and the Grim Reaper is knocking at the door.