The Fed, The Not So Invisible Player

In 1987, when program trading was in its infancy, the suspected Plunge Protection Team, operated by the Fed, began to show itself with some consistency.

In the S&P 500 Pit, the tell for Plunge Protection Team presence were large buy orders for 200 contracts or more that kept coming into the pit. One after another as each order was completed. Keep in mind in 1987, the value of 1 S&P point was $500, double what it is today. The buying would continue until the market turned to recover significant loss. The equivalent in the ES today would be buying 2000 contracts or more at a time.

Please note it would be hard to fathom the CFTC holding the Fed accountable to position limits. Also note the Fed has access to unlimited capital, courtesy of the U.S. Taxpayer, so margin calls are never an issue. Combine no position limits with unlimited capital and the Fed’s ability to move the market is unmatched.

Wednesday’s record rebound gave strong indication the Plunge Protection Team was activated. Yesterday’s late session rebound likely confirmed they are in the game cleaning up the mess they (the Fed) created.

Historically the Fed cut’s rates when the market weakens. This time the correction, triggered by recognition of bad behavior and over-valuation of FAANG stocks; was severely extended by Fed .25 rate hikes. September and again in December. Adding another $110 B, on top of the $ 110 B from two .25 rate hikes earlier in the year. Collectively increasing the cost of financing the $22 T debt by $220 B.

Combine the fact inflation is right at or just below the Fed’s year over year inflation target of 2% based on last Friday’s PCE (Personal Consumption / Expenditure) of 1.9%; with the Fed’s own forecast of GDP slowing to 2.4 in 2019 and 1.9 in 2020.  And it is difficult to structure a credible argument for the two .25 hikes the Fed is projecting for 2019.

My expectation is the Fed will not be able to defend the December rate hike and rescind with .25 point cut in the very near future. They will lose any remaining credibility arguing for 2 more hikes in 2019 against their projections of significantly lower GDP.  So look for a cut before or during the January FOMC Meeting plus language moving away from 2019 hikes.

The Fed is a decade behind in its thinking. Needs to wise up and take a long measure of all the forces repressing inflation. Capacity Utilization at 78.4%; Workforce Non-Participation Rate of 62.9%; increasing global competition helped by fairer trade agreements; and ever increasing cost savings gained through technology and regulatory clawback are just a few things to consider. Did I mention energy costs dropping like a stone?