David Rosenberg: Fed pulls the old bait and switch and investors are left kicking air

Two pivots separated by an hour on Wednesday. The central bank tells us that it is aware of the policy lags but still intends to take the funds rate above the median dot-plot terminal rate forecast.

The yield on the two-year T-note was the moment that everything got undone. After the bombshell during the Q&A, the S&P 500 plummeted 134 points, or 3.4 per cent, and the Dow Jones industrial average fell by 905 points.

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I won't do a writeup on the Fed just because of the press statement. This isn't the first time the statement has given a fake head, and it pays to wait.

We are all called Charlie Brown and Lucy. For the first time, the Fed is aware of the policy lags, but it was more of a meaningless statement, since it was only going 50 basis points or 25 basis points until it saw a change in the economy.

Powell knows how the dominant rental component in the consumer price indicator is constructed and how it is going to lag inflation in real time. He dismissed his favourite yield curve in a question from a reporter who reminded him that when it was steep, the view was no problem.

The need for easing policy was intimated by Powell back then. The spread between three-month rates and the 18-month forward expectation of the three-month rate touched two basis points in recent days, and is well off the nearby high of 130 basis points.

Powell said that the policy lags are long because of the weak economy, and that the lags are already kicking in. The punch bowl is being taken away by the Fed.

The bulls may have been tested by the press statement. The stock market boom gave the Fed incentive to reduce it. Until the market responds positively to any sign of a pause, the Fed will keep on going.

There is a risk to the stock market with this information. The lesson was to see how the market responds to the smallest shift in tone and the Fed didn't like what it saw. The central bank doesn't want the stock market to go up, that's what an economist said after JacksonHole. It was enough said. It works both ways.

We don't have to wait. Powell made a statement on the macro scene.

The U.S. economy has slowed down. So far this year, real GDP is unchanged at a rate of 2.6 percent. Spending and production are expected to grow modestly this quarter. Lower real disposable income and tighter financial conditions have led to a slower growth in consumer spending. Higher mortgage rates have led to a decline in housing activity. Business fixed investment appears to be being weighed down by higher interest rates and slower growth.

We haven't yet seen all the bad stuff hit the wall, but the Fed is still keen to hammer the economy and risk assets and tighten into a flat or inverted yield curve The economy is not doing well. Inflation is a lagging indicator. He was on both sides of the wage divide. He's familiar with the yield curve. The punch bowl needs to be taken away.

He wants inflation to be in assets. This time, he has Joe Biden giving him the nod instead of Donald Trump, which is what he did in the previous year.

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