Fed Pivots

Political pressures and harsh realities of the underlying economy

From Tuomas Malinen’s Forecasting Newsletter.

Issues discussed:

• Credit card delinquencies hint to an avalanche of credit card defaults to come.

• Loan issuance of U.S. banks is slowing at a pace not seen outside recessions, with the financial situation of households deteriorating rapidly.

• The Fed ‘pivot’ is likely to be more politically than economically motivated.

The Federal Reserve essentially ‘pivoted’ on Wednesday, with the Fed Chair Jerome Powell hinting of rate cuts to come, while the FOMC (Federal Open Market Committee) kept rates on hold. Since then we have seen a walk-back by President of the New York Fed stating that “we’re really not talking about rate cuts”.

It should be noted that the rather massive contradiction may also be pre-planned meaning that the Chair delivers a verbal pivot, from which following comments walk back on. This way you get a ‘pivot-reaction’ from markets and possibly on the economy. Markets rise, credit markets recover and sentiment rises. I have no idea, whether the Fed officials could be this cunning, but based on what’s happening in the economy, I consider it to be possible, albeit not highly likely.

I am currently in Nashville, Tennessee, where you see near-empty malls in downtown, despite of the holiday season right upon us. People are also talking, how bad the economy is and there’s a cautious mood, which implies that many are sensing something major approaching. We can assume that the Federal Reserve is “sensing” this too.

I think that the Fed pivot, and walk-back, are both politically and economically motivated. Signs of serious economic headwinds approaching are getting louder. At the same, time President Biden is struggling to cope with Ukraine losing the war, while trying to stop Middle East from blowing up. These form a major risk to his main goal, i.e., re-election. The Fed must be feeling this pressure, but let’s take a closer look of what’s going on.

The approaching havoc of credit card delinquencies