Pro Perspectives 3/30/23

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March 30, 2023
Tomorrow morning we'll get core PCE for the month of February.  This is the Fed's favored inflation gauge.
That said, a lot has happened since February, which has included another rate hike.
That puts the effective Fed Funds rate (at 4.83%) ABOVE the most recent year-over-year core PCE (which was 4.7%), a position where the Fed believes they put downward pressure on inflation.  Looking through Wall Street estimates on tomorrow's (February) numbers, the year-over-year inflation number is expected to be a touch lower.
All of this said, this inflation data is a lot less important than it was a month ago.  We already know the level of rates is creating more than just downward pressure on inflation, it has created a dangerous shock to the economy, which will undoubtedly result in a credit crunch.
And with that, the Fed has already been forced into reversing course on quantitative tightening (back to QE). 
As we've discussed many times, putting the QE genie back in the bottle doesn't have a good record.  In fact, there is no successful record of it (globally). 
Unforeseen consequences tend to arise.
For example, back in 2019, after spending nearly two years draining liquidity from the financial system (quantitative tightening), the Fed created a cash crunch (a scramble for dollars).  From too much liquidity, to too little.  It erupted in the interbank lending market — and it erupted quickly. 
The spike in the chart below is what happens when banks lose confidence in their ability to access cash.

The Fed was quickly forced to pump liquidity back into the financial system, and at a record rate in Q4 of 2019.
QE was back, and the Fed balance sheet continued expanding right up to the covid shutdowns (where it subsequently went into a new, higher gear).
In the chart above, you can see the response of stocks to the restart of QE in late 2019 … up 15% at a near perfect 45 degree angle.
Fast forward to today, and the Fed has once again induced another liquidity shock.  And once again, the Fed is back to pumping liquidity, expanding the balance sheet.  
As Bernanke once said, QE tends to make stocks go up.  Let's take a look at the current chart on stocks … 
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