The Horse Whisperer
by Brian Broberg | April 15, 2024 | Estimated read time: 5 minutes
You’ve heard of a “horse whisperer,” right? If not, these are people who are so familiar with horses that they actually talk to them and influence their behavior through whispers. Some people claim that they can even diagnose a horse’s medical condition. I have a friend who is a horseman, and he is utterly amazing with these beautiful, yet powerful creatures. But he never claims to be a horse whisperer. I’d say, however, his interactions with a stallion would quietly tell otherwise.
This story about horsemen and trusty steeds brings up a question. Do you know that the US Federal Reserve (the Fed) has a “Fed whisperer?” A few years back, traders on Wall Street and the well-placed in Washington lightheartedly refer to Nick Timiraos as the Fed whisperer. Mr. Timiraos is the chief economics correspondent for the Wall Street Journal, responsible for writing about monetary policy as set by the Fed. Wall Street believes Nick knows what the Fed is going to do before anyone else. Thus, the monicker.
Then he gets busy writing about what he believes. And how much he writes is prolific. For example, on Wednesday, April 10, 2024, he wrote two six-page articles and co-wrote a third. Why so busy that day? It was because of the highly anticipated inflation report that came out that morning. Its implications for the direction of interest rates are of utmost importance. What happened, and why was Nick so urgent in his writings?
The bottom line is the inflation numbers were hotter (higher) than expected and the market did not like it. Stocks and bonds both sold off. Why? The implication of this reading, coupled with other measurements from earlier this year, means that, at a minimum, interest rate cuts will be delayed this year. It may mean there won’t be any at all. So, the market had a conniption, as it is wont to do from time to time.
It reminds me of the “Taper Tantrum” back in 2013? The bond market was expecting the Fed to continue printing money to support the economy. Instead, the Fed announced that they would be tapering, or slowing down the printing press. The bond market responded by selling off, and hard. This was known as the Taper Tantrum. The same idea applies for this past Wednesday, but in this case, the tantrum was by both the stock and bond markets, yet not nearly as severe as back then.
But the Fed had something else for the markets to consider.
Coincidence or not, the Fed released the minutes of their March meeting—the same morning as the inflation report. Paraphrasing here, the text said that they are considering slowing down the “un-printing” of money. (There’s a lot more to it than I can get into here, but this is a technique for taking money out of the financial system, thus slowing the economy down. It is akin to raising interest rates and, in the case of the last two years, done in tandem.) If they actually un-print less money, then it is tantamount to reducing rates, without actually changing their interest rate policy.
Huh?
I know. I know. This is as hard to understand as it is to whisper to a horse. Let’s walk through the process a bit more.
If you recall, during the pandemic the Fed “printed” trillions of dollars to keep the world from falling apart. But unfortunately, while they successfully held our planet together (as the story goes), they also created a massive inflation of prices—the worst in forty years! Simply put, there was too much money chasing after too few goods. Therefore, prices moved higher.
To reverse this inflation, they have two major policy tools in their saddlebags. They can raise interest rates, which they started in March 2022, and quickly moved them higher to current levels. This is the first tool. But they can also use the second, which is to “un-print” money. They started un-printing $90 billion per month simultaneously with their interest rate raising scheme. This un-printing was like siphoning off water from your pool so you can’t swim in it. In this case, they are choking off the supply of money so you can’t swim with that either.
This process is working because inflation is coming down, and last year, it was at a brisk pace. But last Wednesday’s inflation report intimates that the downward trend in inflation may have stalled. This puts the Federal Reserve in a tough place. Their choice is to either leave rates where they are (don’t cut them) and risk stalling out the economy, or … cut them and reignite inflation. But if you know Jerome Powell, the Fed chairman—and the Fed whisperer does, then you know that he doesn’t have to cut rates. He can use the other tool, which is discussed in their March meeting minutes. As a result, I expect that the Fed will slow down the un-printing of money and announce it soon. And guess what that means? This action will effectively be … a rate cut.
Got it?
(Where is Mr. Ed when you need him?)[i]
I suspect an announcement in this regard from the Fed will be positive for the market, even if just temporarily, or until the market starts crying again.
For context, since April 1, the markets may already have gone into corrective-mode. This move downward could be up to 10% from the all-time highs that were set on March 28. But it is just as likely they are going to bounce around in here for a bit. In other words, become temporarily directionless. Of course, no one likes that, but either way, it’s realistic.
So, that’s the shorter-term outlook. The good news is that eventually the markets do get over their tantrums. I suspect this will be no different because the economy is strong, growing, and people have jobs.
What is the outlook for the rest of the year? Despite the near-term volatility, I expect we’ll see the market’s at all-time highs again, perhaps by the autumn. We may go higher after the election. Why?
Because by then, we’ll all be glad that the racehorses stop talking and the election is over.
[i] Mr. Ed was a TV sitcom, filmed in black and white in the early 60’s. Mr. Ed’s character was a talking horse.