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While solicitously "guiding" the markets to its "earth-shaking" 0.25 percent interest rate increase last Wednesday, the Fed has been expanding its balance sheet – big time -- by buying a huge amount of assets in exchange for cash to reassure equity and bond traders.

Only during the two weeks preceding the push of the federal funds rate (interest rate banks charge each other for overnight loans) to the 0.75-1.0 percent range, a total of $115.5 billion of new liquidity has been created.

If that was meant to confuse the gallery it is mission accomplished. Just look at weird headlines wondering how the markets could rally in reaction to "credit tightening," and muddled up commentaries about preferred maturities and asset classes as the Fed continues to wind down the long celebration of abundant and cheap credit.

But the gallery has changed. It seems that the famed "Fed-watchers," drawing six- and seven-figure annual compensations, have all been fired, because now, the ingénues think, the Fed is telling it all in its "forward market guidance."

So, here is the centerpiece of that "guidance:" The Fed is determined to "normalize" its extraordinarily bloated balance sheet, and negative real interest rates along the yield curve reaching almost all the way to the Treasuries ten-year maturities.

Fool me once …

That's very much at odds with what the Fed is doing. For example, these $267 billion the Fed added to its balance sheet since mid-January represent one-third of its last "normal" average monthly balance sheet of $820 billion before the onset of the financial crisis in 2008. That huge liquidity creation over the last two months has now brought the Fed's monetary base to $3.9 trillion – very close to record-high levels observed in August 2014.

What kind of normalization process is that? These numbers look more like a colossal new round of quantitative easing (QE) totally "missed" – but greatly enjoyed – by financial markets.

The Fed is also slipping by another feat of extraordinary economic management: It is increasing the supply of money while raising its price. It looks like the price of money is no longer determined by its demand and supply. But the Fed is doing it: It pushed up last week the effective rate banks charge each other for overnight loans from 0.66 percent to 0.90 percent, even though excess reserves of the banking sector (i.e., the pool of funds for overnight loans) increased since the beginning of this month by $115 billion to an incredibly high level of $2.2 trillion.

It's like the Groucho's number: Who ya gonna believe, me or your own eyes?

And the Fed's magic goes on. The latest rate hike is motivated by an "economy doing well," and an inflation rate that is still "within the policy targets."

A good "Fed-watcher" of yore would ask: Economy doing well? You mean an economy that slowed down to an annual growth rate of 1.6 percent last year from 2.6 percent in 2015? Or is the Fed enthusing over the fourth quarter 1.9 percent growth rate -- a sharp slowdown from 3.5 percent in the third quarter -- because it exceeded the dismal 1.5 percent noninflationary growth potential of the U.S. economy?

Maybe the Fed sees a lot of firepower in the slowing growth of inflation-adjusted after-tax household income?

This income variable drives three quarters of the U.S. economy (private consumption and residential investment), but its growth last year declined to 2.8 percent, well below its 3.5 percent increase in 2015.

Inflation's structural causes

How about jobs? Yes, we've made big strides there, but we are still struggling to connect 14.9 million people (9.4 percent of the labor force) with stable employment. And nearly 40 percent of the civilian labor force is out of the labor market. President Trump apparently counts on German-style vocational training to make these people employable again, but that's a long-term project still on the drawing boards.

Are we forgetting the promised "massive middle class tax cuts," the "largest since the Reagan era?"

Well, maybe we are, but it remains to be seen to what extent revenues from taxing the rich, and from an expected faster economic growth, can finance middle class tax cuts. The White House apparently wants a deficit-neutral budget and is rearranging public spending accordingly. That's the way it should be because the U.S. can't afford a widening budget gap. Remember, we need to push the primary budget surplus (budget before interest charges on public debt) to 3-4 percent of GDP (from a current deficit of 1 percent of GDP) -- and to keep it there for many years -- to stop and reverse the progression of America's $20 trillion in national debt.