Fed Policy Error Update

It was a boring day on the markets so I was perusing some of my Fed (FRED) database charts and noticed that consumer delinquencies have been updated through Q4 2023. In my chart I divide the nominal dollar amount of delinquencies by the CPI to show comparison versus prior periods. The FRED chart I showed on Twitter goes back 40 years. The StockCharts custom chart I show below focuses specifically on 2008 and 2020. Why? Because both prior times when inflation-adjusted delinquencies rose to this same level, the Fed was already in rate cutting mode. I am referring specifically to the periods Q3 2008 and Q4 2019. Both those times the Fed took rates down to the range of ~1.50-2% and then "paused" to see what would happen relative to inflation and the economy. This time of course, they have kept rates pinned at 5.25% despite the increase in delinquencies. To understand why, we have to first remember that interest rates are 3x higher now than they were pre-pandemic, whereas the Fed balance sheet (liquidity) still has yet to be normalized back to pre-pandemic levels. In other words, Fed policy is extremely market friendly and extremely borrower unfriendly.

In the third panel below I also show the Fed's financial stress index which is also from Fed FRED as follows: https://fred.stlouisfed.org/series/STLFSI4

"The STLFSI4 measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together"

Or not move at all because markets are soaked in liquidity.

In this chart we see stocks with the Fed balance sheet.

It should be clear to everyone that the new Fed bailout level is not what it was during the pandemic.

In summary, central banks got investors into over-valued markets, but they have no strategy for how to get them out intact. In the meantime they are burying the middle class in debt delinquencies.