The Federal Reserve, facing the daunting task of selling $8 trillion in assets acquired through freshly printed money, is inadvertently steering the financial system towards a potential crisis. The linchpin of our financial stability, the treasury market, could be at risk of a crash, with the added threat of exacerbating already soaring mortgage rates.
The Fed’s misstep in financing over $6 trillion in federal deficits has left it trapped in a precarious situation, and the consequences will inevitably be borne by the public. The market is now engaged in a fierce battle with the Fed, unlike anything seen before.
Market futures are currently projecting the Fed Funds Rate to conclude 2024 around 4.00%. However, the latest Fed dot plot reveals a stark contrast, with FOMC members anticipating rates to finish at 5.125%—higher than market expectations. This discord implies a scenario where every member of the FOMC would need to be proven wrong for the market to be right, a situation where history suggests that fighting the Fed is a losing game.
Recent developments, such as the core inflation surging to 4%, double the Fed’s 2% target, further complicate the situation. The S&P futures market witnessed a significant reversal following this CPI number, revealing the market’s reliance on singular data points amid hot GDP and NFP figures. Additionally, Oracle’s cautionary outlook adds to the uncertainty.
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As we navigate this precarious exit, the looming risk of financial instability underscores the need for vigilant monitoring of market dynamics and the Fed’s strategies. The coming months promise to be a critical juncture, with potential repercussions rippling through various sectors.
Peter St Onge, Ph.D. @profstonge
The Fed is sitting on an $8 trillion mountain of stolen goods that it needs to get rid of. Selling it could strangle credit, hike mortgages, and crash treasury markets.
By writing a blank check to Washington, the Fed stuffed an $8 trillion elephant onto a canoe. There is no elegant way to get it off.
https://twitter.com/i/status/1734204649970782525
Poster Comment:
Listen to this tweet. Scary. $10 trillion in debt to be sold. FED holds $2.5 trillion in MBS.