WAS THE FED HAWKISH? ARE THE MARKETS THIS FRAGILE?

Was the outcome of the FOMC meeting a surprise?  The Federal Reserve signaled that it intends to have two increases in the overnight rate by the end of 2023.  Previously it was suggesting one or none at all.  The Committee also pledged to continue asset purchases at a $120 billion monthly pace until “substantial further progress has been made on employment and inflation.”

FRB Chair Powell stated “inflation could turn out to be higher and more persistent than we expect,” commenting further that inflation is seen as “coming back down sometime next year.”  He stated bottlenecks are “larger than anticipated” but once these bottlenecks are worked out and the size of the labor market increases, prices will moderate, thus suggesting inflation was indeed “transitory.”

Bloomberg writes “the number of officials who seat least one rate hike next year has increased to seven from four.  As for 2023, at least four members have increased their forecasts from zero to two hikes.  This is quite a big shift in three months but is no where what to be expected with current and expected growth and inflation rates.”  [Note there are 18 people on the FOMC, only twelve of which vote]

Is the Fed living in denial?  As stated several times there is a mark difference between sentiment and market behavior, the latter of which might be changing to align itself more with sentiment.

Equities dropped about 1% on the statement but recovered about 50% of the decline by day’s end.   Wow!  Just the mere mention of changing monetary policy within the next 30 months is met with selling.  Are equites this fragile?

Treasuries also sold off on the news, dropping about ¾ points.

Continuing with the trend of basic economics and finance turned upside down, according to the financial blog FISUM, the Administration has eased fiduciary and suitability standards for ESG investing.

As noted several times, ESG investing does not necessarily focus on the financial merits but rather on the subjective environmental, social and governance aspects of an idea.  Economics and profitability are not a major tenant.

Many times, I have commented about BlackRock and how its CEO Larry Fink is a champion of ESG investing, writing letters to both boards and management demanding more progressive polices in the name of diversity, inclusivity and climate.  Because of its massive size BlackRock controls between 6% and 11% of all S & P 500 companies.  It is the ultimate activist investor that would make Gordon Gecko blush.

The fees charged for ESG investing/management is anywhere between 50% and 300% higher than traditional fees.

As stated, BlackRock’s Fink is an ardent supporter of progressive causes and the Administration.  Can I cynically write BlackRock is influencing public policy for its own economic benefit?

Higher fees and lower fiduciary standards on ideas where many lack financial viability.  As I commented many times, the former head of ESG investing for BlackRock stated in USA Today over 90% of ESG companies will flounder.

In many regards ESG government policy is similar to policy that helped usher in the financial crisis of 2008-09.  Government mandated banks/Wall Street to originate mortgages to people with questionable credit, partially the result of the 1977 Community Reinvestment Act, a policy that all Administrations enthusiastically supported.

Government asked Wall Street to devise products that would diversify risk hence the birth of CDOs and CMOs.  Wall Street made a gazillion dollars to comply with federal directives.  The rest is history.  Will ESG lending follow the same path?

What will happen today?

Last night the foreign markets were down. London was down 0.59%, Paris down 0.15% and Frankfurt down 0.14%. China was up  0.21%,  Japan down 0.93%  and Hang Seng up 0.43%.

The Dow should open lower on the potential change of monetary policy.  Dow futures are off about 0.2% while NASDAQ off about 0.6%.   The 10-year is up 6/32 to yield 1.56%.

 

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