“Fed officials are much more worried about the recession risk than they are claiming or admitting in public. The simple proof: why would the Fed ever pause, as it did yesterday, when all inflationary signals and pressures are mounting (headline, every measure of core, wage growth, falling productivity growth, sharply rising unit labor cost, oil, commodities, you name it)?
Why? The only and simple answer is: they are starting to get scared of the coming recession. ….The Fed is telling you that it expects demand to slow further – regardless of the effects of past monetary tightening – and thus lead to lower inflation……So, there are only two options: either the Fed does not believe that inflation will stabilize in which case it is pausing now because it is already panicky about the recession; or, if it truly believes its own forecast of slowing inflation, it must be expecting a sharp economic slowdown, a much sharper one than the Bernanke forecast or the Fed forecast of a soft landing. ….
Fed officials are troubled that non-residential investment that was supposed to pick up and sustain aggregate demand at the time when housing is falling and consumption growth is slowing, is instead headed south. This fall in non-residential investment is not a surprise, as I have argued before: corporations are flush with cash and profits but they do not see any good real investment opportunities as there is excess capacity and as demand is now slumping. Thus, the unprecedented share buyback bonanza – the biggest in US history – which we are now experiencing proves that firms do not have any good productive investment use for all the profits they have; and they are thus returning these profits to shareholders. Of all bearish signals in the economy, this investment slump and buyback bonanza is one of the strongest leading indicators of the coming recession….
n conclusion: investors are still behind the curve debating whether the FOMC statement suggests a further hike sometime in the fall. The reality is different: the next move of the Fed will be easing, most likely in the fall when the signals of a recession become too self-evident for the Fed to ignore them. The only thing that could prevent a Fed Funds rate cut (and lead the Fed to keep a pause or even hike) or postpone the cut into 2007 is a sharp spike in core and actual inflation driven by a further oil shock or a build-up of domestic inflationary forces….But, as I have persistently argued, even such Fed ease will not prevent the coming recession. The recession boat has left the harbor and there is very little the Fed can do to prevent it.”
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