{"id":47762,"date":"2019-03-30T23:21:26","date_gmt":"2019-03-31T06:21:26","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=47762"},"modified":"2019-03-30T23:22:04","modified_gmt":"2019-03-31T06:22:04","slug":"recession-risks-revealed-in-disindependence-of-fed","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2019\/03\/30\/recession-risks-revealed-in-disindependence-of-fed\/","title":{"rendered":"Recession Risks Revealed in the &#8220;Disindependence&#8221; of the Federal Reserve"},"content":{"rendered":"\n<p>Major central banks typically cut interest rates in response to economic stresses; they ease when the data force them to do so. Some important exceptions in recent history happened 1) in 2016 when Mark Carney&#8217;s Bank of England cut rates as a cushion against the potential downsides of the pro-Brexit vote, and 2) when the Bank of Canada cut its rate in response to the steep drop in oil prices. During both policy changes, the central banks reassured markets that the rate cuts were just precautionary. Both cuts have since been rolled back. On CNBC on Friday, March 29, Larry Kudlow, President Trump&#8217;s National Economic Council Director, shared his and the President&#8217;s opinion that <a href=\"https:\/\/www.youtube.com\/watch?v=mHlKGgGnJE8\">the Fed should cut rates by 50 basis points<\/a> as a buffer against global economic weakness. <\/p>\n\n\n\n<figure class=\"wp-block-embed-youtube wp-block-embed is-type-video is-provider-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" width=\"1200\" height=\"675\" src=\"https:\/\/www.youtube.com\/embed\/mHlKGgGnJE8?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n\n\n\n<p>Kudlow insisted that the U.S. economy is perfectly fine and rattled off its strengths. He emphasized that there is no emergency. Either of these conditions by themselves represent an argument against any rate cut. Combined, these conditions make a rate cut a non-starter. So clearly Kudlow must be worried about <strong>something<\/strong>. He provided two clues: the inverted yield curve and Q4&#8217;s big drop in commodity prices.<\/p>\n\n\n\n<p>Just last week <a href=\"https:\/\/drduru.com\/onetwentytwo\/2019\/03\/24\/how-to-understand-yield-inversion-and-its-relationship-to-recessions\/\">I covered the potentially ominous economic signals coming from the inverted yield curve<\/a>. In his CNBC interview, Kudlow effectively confirmed we should all be watching the inversion with some concern. Accordingly, I will be referring to this post as much as possible as the market works out its chosen interpretation of the inversion.<\/p>\n\n\n\n<p>The reference to the drop in the commodity index confused me because the commodity indices have almost fully recovered from that decline. It does not make sense for the Fed to cut rates in response to something that is almost over.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"1320\" height=\"883\" src=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190329_DJCI.png\" alt=\"The Dow Jones Commodity Index (DJCI) dropped sharply to close out 2018, but the index is already closing in on its October high.\" class=\"wp-image-47765\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190329_DJCI.png 1320w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190329_DJCI-768x514.png 768w\" sizes=\"auto, (max-width: 1320px) 100vw, 1320px\" \/><figcaption>The Dow Jones Commodity Index (DJCI) dropped sharply to close out 2018, but the index is already closing in on its October high.<br><strong>Source: <\/strong><a rel=\"noreferrer noopener\" aria-label=\"TradingView (opens in a new tab)\" href=\"http:\/\/ngview.com\/x\/D8QEhTod\/\" target=\"_blank\"><strong>TradingView<\/strong><\/a><\/figcaption><\/figure><\/div>\n\n\n\n<p>The Dow Jones Commodity Index (DJCI) <a href=\"https:\/\/us.spindices.com\/documents\/methodologies\/methodology-dj-commodity-index.pdf\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"consists of (opens in a new tab)\">consists of<\/a> petroleum, copper, soybeans, cattle, and wheat. Iron ore, which in many ways is more economically important given China&#8217;s massive consumption of the commodity, followed a different pattern given supply issues. Iron ore suffered only the briefest of pullbacks in November and rallied from there.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"1618\" height=\"1137\" src=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190329_ironore.png\" alt=\"The prices of iron ore have stayed relatively strong over the past year or so.\" class=\"wp-image-47766\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190329_ironore.png 1618w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190329_ironore-768x540.png 768w\" sizes=\"auto, (max-width: 1618px) 100vw, 1618px\" \/><figcaption>The prices of iron ore have stayed relatively strong over the past year or so.<br><strong>Source: <\/strong><a href=\"https:\/\/www.businessinsider.com.au\/iron-ore-price-vale-update-2019-3\"><strong>Business Insider Australia<\/strong><\/a><\/figcaption><\/figure><\/div>\n\n\n\n<p>I think the more important point about Kudlow&#8217;s commodity reference is that he probably used it as a proxy for the stock market. The stock market plunge coincided with the decline in commodities.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"550\" height=\"375\" src=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190329_SP500.png\" alt=\"The S&amp;P 500 (SPY) continues its recovery from Q4's plunge. This time, support from the uptrending 20DMA may be prepping the index to spring higher for a challenge of the October high.\" class=\"wp-image-47768\"\/><figcaption>The S&amp;P 500 (SPY) continues its recovery from Q4&#8217;s plunge. This time, support from the uptrending 20DMA may be prepping the index to spring higher for a challenge of the October high.<br><strong>Source: <\/strong><a rel=\"noreferrer noopener\" aria-label=\"FreeStockCharts.com (opens in a new tab)\" href=\"https:\/\/www.freestockcharts.com\" target=\"_blank\"><strong>FreeStockCharts.com<\/strong><\/a><\/figcaption><\/figure><\/div>\n\n\n\n<p>In other words, the drop in stock prices freaked out Kudlow and company just as much as it freaked out the Fed which in turn capitulated on its planned rate hikes for 2019. I can only imagine the groans from Chair Jerome Powell as he internalizes the implications of Trump failing to find mollification in <a href=\"https:\/\/drduru.com\/onetwentytwo\/2019\/03\/20\/federal-reserve-gives-gold-good-heave-upward\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"the Fed's now deeply dovish stance (opens in a new tab)\">the Fed&#8217;s now deeply dovish stance<\/a>. I call this phase the &#8220;disindependence&#8221; of the Fed.<\/p>\n\n\n\n<p>Kudlow was very careful to reiterate that he believes in the independence of the Federal Reserve. Those assurances are moot when married to a strong opinion of what the Fed <strong>should<\/strong> do. The Fed officially stays independent, but in practice, the Fed is not independent as it responds to cues from the White House: disindependence.  <\/p>\n\n\n\n<p>Interestingly enough, there <strong>is<\/strong> a case for worrying directly about what the Fed is doing. Last year, I reprised a post on &#8220;<a rel=\"noreferrer noopener\" aria-label=\"The Fed-Related Chart That Most Concerns the Stock Market (opens in a new tab)\" href=\"https:\/\/drduru.com\/onetwentytwo\/2018\/11\/17\/fed-related-chart-that-most-concerns-stock-market\/\" target=\"_blank\">The Fed-Related Chart That Most Concerns the Stock Market<\/a> which showed how the peak in a Fed rate-cut cycle often precedes a recession. The Fed keeps hiking until some data or process convinces it to stop. Unfortunately, the seeds of the next slowdown have apparently taken root by then. In today&#8217;s case, the process  underway may be a bottoming in continued claims for unemployment. Continued claims have not risen this long since the recession ended.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"1168\" height=\"465\" src=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_ContinuedClaimsVsFedRate.png\" alt=\"The Federal Reserve can often hike its way into a recession.\" class=\"wp-image-47770\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_ContinuedClaimsVsFedRate.png 1168w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_ContinuedClaimsVsFedRate-768x306.png 768w\" sizes=\"auto, (max-width: 1168px) 100vw, 1168px\" \/><figcaption>The Federal Reserve can often hike its way into a recession.<\/figcaption><\/figure><\/div>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"1168\" height=\"465\" src=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_ContinuedClaimsVsFedRate_Since2009.png\" alt=\"This close-up makes the recent rise, albeit small, in continued unemployment claims.\" class=\"wp-image-47771\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_ContinuedClaimsVsFedRate_Since2009.png 1168w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_ContinuedClaimsVsFedRate_Since2009-768x306.png 768w\" sizes=\"auto, (max-width: 1168px) 100vw, 1168px\" \/><figcaption>This close-up makes the recent rise, albeit small, in continued unemployment claims.<br><strong>Sources: U.S. Employment and Training Administration, Continued Claims (Insured Unemployment) [CCSA], <\/strong><a rel=\"noreferrer noopener\" aria-label=\"retrieved from FRED, Federal Reserve Bank of St. Louis; (opens in a new tab)\" href=\"https:\/\/fred.stlouisfed.org\/series\/CCSA\" target=\"_blank\"><strong>retrieved from FRED, Federal Reserve Bank of St. Louis<\/strong><\/a><strong>; Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [FF], <\/strong><a rel=\"noreferrer noopener\" aria-label=\"retrieved from FRED, Federal Reserve Bank of St. Louis (opens in a new tab)\" href=\"https:\/\/fred.stlouisfed.org\/series\/FF\" target=\"_blank\"><strong>retrieved from FRED, Federal Reserve Bank of St. Louis<\/strong><\/a><strong>, March 31, 2019.<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n<p>So if the Fed is truly done hiking rates, combine an inverting yield curve with a sprinkling of a White House spooked into asking the Fed for help and I see a risk of recession considerably higher than the 3.2% odds from February&#8217;s read <a rel=\"noreferrer noopener\" aria-label=\"from the St. Louis Federal Reserve. (opens in a new tab)\" href=\"https:\/\/fred.stlouisfed.org\/graph\/?graph_id=367494&amp;rn=931\" target=\"_blank\">from the St. Louis Federal Reserve.<\/a> <\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1168\" height=\"470\" src=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_SmoothedRecessionOdds.png\" alt=\"The &quot;official&quot; odds of a recession as of February are just a blip for now.\" class=\"wp-image-47767\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_SmoothedRecessionOdds.png 1168w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2019\/03\/190330_SmoothedRecessionOdds-768x309.png 768w\" sizes=\"auto, (max-width: 1168px) 100vw, 1168px\" \/><figcaption>The &#8220;official&#8221; odds of a recession as of February are just a blip for now.<br><strong>Source: Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities [RECPROUSM156N], r<\/strong><a rel=\"noreferrer noopener\" aria-label=\"etrieved from FRED, Federal Reserve Bank of St. Louis (opens in a new tab)\" href=\"https:\/\/fred.stlouisfed.org\/series\/RECPROUSM156N\" target=\"_blank\"><strong>etrieved from FRED, Federal Reserve Bank of St. Louis<\/strong><\/a><strong>, March 30, 2019.<\/strong><\/figcaption><\/figure>\n\n\n\n<p>Be careful out there!<\/p>\n\n\n\n<p>Full disclosure: no positions<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Major central banks typically cut interest rates in response to economic stresses; they ease when the data force them to do so. Some important exceptions in recent history happened 1) in 2016 when Mark Carney&#8217;s Bank of England cut rates as a cushion against the potential downsides of the pro-Brexit vote, and 2) when the &#8230; <a title=\"Recession Risks Revealed in the &#8220;Disindependence&#8221; of the Federal Reserve\" class=\"read-more\" href=\"https:\/\/drduru.com\/onetwentytwo\/2019\/03\/30\/recession-risks-revealed-in-disindependence-of-fed\/\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[456,199,59,58],"tags":[1667,2171,1595,676,2101,115,65,362],"class_list":["post-47762","post","type-post","status-publish","format-standard","hentry","category-bonds-2","category-commodities","category-economy","category-federal-reserve","tag-continued-claims","tag-djci","tag-federal-reserve","tag-iron-ore","tag-larry-kudlow","tag-monetary-policy","tag-sp-500","tag-spy"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Recession Risks Revealed in the &quot;Disindependence&quot; of the Federal Reserve - ONE-TWENTY TWO: Trading Financial Markets<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/drduru.com\/onetwentytwo\/2019\/03\/30\/recession-risks-revealed-in-disindependence-of-fed\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Recession Risks Revealed in the &quot;Disindependence&quot; of the Federal Reserve - ONE-TWENTY TWO: Trading Financial Markets\" \/>\n<meta property=\"og:description\" content=\"Major central banks typically cut interest rates in response to economic stresses; they ease when the data force them to do so. 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Some important exceptions in recent history happened 1) in 2016 when Mark Carney&#8217;s Bank of England cut rates as a cushion against the potential downsides of the pro-Brexit vote, and 2) when the ... 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