"Seemed like the right thing"

what do they say about good intentions?

By now I’m sure many of you have heard that the Fed decided to raise the Fed Funds Rate (FFR) 75 basis points yesterday. This was the largest increase in the FFR since 1994. It sparked a panic buy in the market. Today reality is settling in. The Federal Reserve Press Release on the topic reads like someone who is out of touch with reality. Right at the top they start off with a doozy.

Overall economic activity appears to have picked up after edging down in the first quarter.

“Appearances are often deceiving.” -Aesop

It is quite amazing to start off their statement this way when retail sales are dropping, consumer confidence is on the ropes, and demand destruction is occurring in the housing market. Then there is the whole issue of the 75 basis point increase.

Fed's Powell: 75 Basis Point Rate Hike Not Being 'Actively Considered'

This is from an article published on May 4th. A little more than a month ago 75 basis point increase was not a consideration. Yesterday it not only became a consideration, it was almost a unanimous decision (only Esther George voted for 50 bps).

The Fed has changed playbooks. They have made the transition to MMT. Officially or unofficially, this is the new method to their madness. It started with the covid handouts and has now progressed to the idea of demand destruction. They believe that they need to crush demand in order to rein in inflation. This accounts for the FOMC’s change of heart concerning 75 basis point increases in the FFR. It also accounts for the verbiage of “raising rates above neutral”. They believe that only by extinguishing demand can they cool the animal spirits and temper the inflation beast.

One animal spirit that the Fed has begun to crush is margin debt use.

Margin debt use has continued to weaken. Month-over-month use of margin debt has declined by nearly $20B. The last three months have seen a total of $82B erased from the record. At the same time, cash on the sidelines only picked up by $2B in May.

This shows me that we are in for more pain ahead. Good intentions are not the ultimate measure of truth.