Federal Reserve Raises, Short News Conference, Reaction, Projections September 2026

As expected the Federal Reserve unanimously raised the benchmark rate 25 basis points to 3 3/4 - 4% from 3 1/2 -3 3/4/%.  As Warsh spoke in a short, almost 30 minutes news conference the Dow went down over 800 points as he mentioned continued inflation but later settled at over 600 points down as the Market reacted to what it heard and did not hear.  The Market heard mixed reasons for the raise of a strong economy, continuing high inflation, and transitory issues with Middle East mentioned by Warsh.

Projections by participants (Warsh refused to participate in projections) indicate another raise by year end with some projecting two raises in near future after 2026 year end.  

Economically, raising rate does not moderate inflation caused by transitory issues and interest rates should continue to trend higher as inflation is too high and has been too high for too long.

Futures are higher tonight but we will see if the market sell off continues or temporarily bounces up on Thursday. 

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Will the Fed Surprise the Market and Hold Tomorrow?

The Market is expecting the Fed to raise the benchmark interest rate 25 basis points, but the economic analysis of the different economic data is mixed on whether raising or holding are any better choices or any less harmful.

Hold, raise -- bad time to surprise market?

Hiking into disinflation as economic insurance? 

Are transitory political policies beyond the control of the Fed driving inflation?

Raise or hold will Warsh explain and provide dot plot and forward guidance?

If Warsh does not provide some forward guidance and data plot, and he has not done so in the past and is disposed to less communication, the Market will punish him again and more strongly than the last time he was not communicative in the Fed news conference. 

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Bessent's Treasury Buybacks are Inept and MIsguided

Treasury Secretary Bessent announced a second buyback of U.S. treasuries triple the size of the previous $2 billion and the bond market did not appreciate it with interest rates going up in reaction.  Bessent was defiant in his announcement asserting the bond market investors do not understand the fundamentals and he was going to rule the house.

Bessent has failed to learn from the first buyback that lowered interest rates for one day and then went back to where they were.  It was seen as stirring inflation fears and a misunderstanding of what drives bond market fundamentals as well as arousing international concern about the United States fiscal credibility.  The Norwegian Sovereign Fund reallocated out of U.S. treasuries into other U.S. bonds and mortgage securities.  The Dutch Central Bank withdrew gold out of the U.S. to London citing growing geopolitical risks.  This is what happens when the Treasury acts as if it does not understand all the drivers of treasury bond rates and that not all of those drivers are under the control of the Treasury.  

This misunderstanding and failure to understand all of the drivers of treasury bond interest rates was only intensified by the Treasury's prior intervention to support the Japanese yen which  the market and economists found incomprehensible.  While Bessent was fearful of a failure of the yen carry trade leading to the Japanese government selling U.S. treasuries driving interest rates higher and possibly leading to a currency crisis which could become contagious in Asia, he ignored the current increase in foreign domestic investment, the Japanese economy, bond market trading profit seeking fundamentals, and the AI growth driving demand for cash in the U.S. bond market.  In his recent announcement of the second bond buyback, he doubled down on how correct he was and he knew more than anyone else.

Bessent is acting as if he has drunk the Kool-Aid from the Presidential trough and the world does not find it comforting and raises doubts of the U.S. as a safe haven.

 

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Michael Pettis and China's Economy and and the Great Rebalancing in Global Trade

 Michael Pettis has published two articles recently with the first dealing with China's debt economy and how it has dealt with it in the past and the problems in dealing with it now going forward and a second article on China's trade surplus and the United States and European trade issues which are parts of the coming trade crisis and global rebalancing.

I think he makes a mistake in analyzing the United States abstractly rather than currently, because the Unites States no longer has a coherent rational trade policy.  The chaos TACO tariffs and failure to appreciate allies have been created by an age demented narcissistic making decisions on gut feelings while incapable of acknowledging reality and whether he is an emperor with or without clothes.

 The Unites States no longer has international credibility and the global bond markets know it. 

 

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