The Fed has completely backed itself into a corner.
The truth that no one wants to admit, is that the Fed should have raised rates in 2012. Instead Bernanke “gifted” QE 3 to the Obama admin to help its re-election bid. The Fed finally got around the hiking rates for the first time in seven years at the end of 2015.
Fast-forward to today and the Fed is now facing stag-flation: a situation in which inflation is developing while the economy is weak.
To whit: ALL four of the Fed’s inflation measures are at or above their targets. And the economy is rolling over hard with the Fed’s own GDP now clocking in sub-1% growth (down from a forecast 3.5% a mere 40 days ago).
Janet Yellen knows the Fed is screwed which is why when a reporter cornered her yesterday as to why the Fed is hiking rates during a GDP collapse she claimed GDP is a “noisy indicator.”
Let that sink in for a moment. The Fed claims that the single most important measure of economic activity that it tracks… is “noisy” or unclear.
This is what happens when you put political posturing above sound economic sense: you end up making a complete fool of yourself… and possibly blowing up the the debt markets.
On that note, it’s worth noting that over $555 trillion in derivatives trade based on interest rates. And with the junk bond market already showing signs of serious duress. We’ve broken out of a bearish rising wedge pattern. If HYG does not reclaim that lower line NOW, then Yellen has a REAL problem on her hands.
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Chief Market Strategist
Phoenix Capital Research