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Rates on Their Way to 10-Year High After Hawkish Fed’s Recent Meeting

November 22, 2018

Rates on Their Way to 10-Year High After Hawkish Fed’s Recent Meeting

hawkish fed meeting

Round and round we go, where the hawkish Fed stops, nobody knows…

There was a bit of tension in the markets last week. This tension stemmed from a prediction that the federal funds rate would be well on its way to a decade high even if the Fed did nothing at their November meeting.

Well, that concern has been justified. In a statement issued after the meeting, the Fed kept their funds rate at 2 – 2.25%, the same range after their September meeting.

But nothing in their statement indicated changes in their plan for another rate hike in December and three more in 2019.

In fact, a CNBC article points to a quarter point increase in December. Assuming this happens, that would send the funds rate to its highest since 2008 (see chart below):

us fed funds rate

The primary credit rate remained steady at 2.75%, according to the Fed statement. That is, until December’s anticipated rate hike.

Another CNBC article published just before the meeting statement was released had a telling statement (emphasis ours):

In recent weeks, financial markets have been gripped by worry and volatility, and some analysts think that in its statement Thursday the Fed may take note of that anxiety as a potential risk to economic growth.

The “No comment” response by the Fed didn’t seem to acknowledge this anxiety.

But the market sure seems to be in a state of worry. Since October 3rd, the Dow Jones has lost 1,566 points as this is written (even after modest recovery).

And the Yield Curve Keeps Flattening

In July, the Fed stopped highlighting the yield curve as an indicator of an imminent recession. Instead, they swept it under the rug.

But according to Patti Domm, the market is still paying attention to it:

…click on the above link to read the rest of the article…

Why the Fed Needs to Raise Rates

March 3, 2017

Why the Fed Needs to Raise Rates

yellen Janet

I have warned that rates will rise BECAUSE the Federal Reserve will be criticized if they fail to do so when they are faced with a stock market that is rising. However, while one by one, several Fed officials have all signaled in recent days that the Fed is ready to resume raising interest rates as soon as this month, the real crisis for the Fed will be raising rates will strength the dollar and put even more pressure on Europe and emerging markets. Hence, the 64 billion dollar question is will the Fed abandon international policy objectives for domestic?

Janet Yellen speaks today in Chicago on the topic of the Fed’s economic outlook. The pundits will scan ever possible word for any hint whatsoever of how likely the central bank is to raise its key short-term rate after it next meets March 14-15, 2017. Traders in futures markets have put the probability of a rate hike at 75%, according to data tracked by the CME Group. Last week the odds were just 50/50. With the rally in the share market this week, many are now fearing a rate hike.

Many Fed officials are suggesting that the strengthening U.S. economy warns of higher inflation and a surging stock market has confirmed a potential rate hike. On Tuesday, William Dudley, president of the New York Fed, said the case for raising rates had “become a lot more compelling”. Robert Kaplan, of the Dallas Fed, said he thought the Fed would likely raise rates “in the near future.” Then Lael Brainard, a Fed board member, also said she thought the case for another hike was strengthening: “Assuming continued progress, it will likely be appropriate soon to remove additional accommodation.” 

…click on the above link to read the rest of the article…

Is the US Heading for an Economic Bust

December 24, 2015

Is the US Heading for an Economic Bust

On Wednesday December 16 2015 Federal Reserve Bank policy makers raised the federal funds rate target by 0.25% to 0.5% for the first time since December 2008. There is the possibility that the target could be lifted gradually to 1.25% by December next year.

Shostak-1

Fed policy makers have justified this increase on the view that the economy is strong enough and can stand on its own feet. “The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident the inflation will rise over the medium term to its 2 percent objective”, the Fed said in its policy statement.

Various key economic indicators such as industrial production don’t support this optimism. The yearly growth rate of production fell to minus 1.2% in November versus 4.5% in November last year.According to our model the yearly growth rate could fall to minus 3.4% by August.

Although the yearly growth rate of the CPI rose to 0.5% in November from 0.2% in October according to our model the CPI growth rate is likely to visibly weaken.

The yearly growth rate is forecast to fall to minus 0.1% by April before stabilizing at 0.1% by December next year.

So from this perspective Fed policy makers did not have much of a case to tighten their stance.

Shostak-2

Fed policy makers seem to be of the view that the almost zero federal funds rate and their massive monetary pumping has cured the economy, which now seems to be approaching a path of stable economic growth and price stability, so it is held.

On this way of thinking the role of monetary policy is to make sure that the economy is kept at the “correct path” over time.

Deviations from the “correct path”, it is held, occur on account of various shocks, which are often seen as of a mysterious nature. We suggest that the present Fed is following the footpath of Greenspan’s Fed, which was instrumental in setting in motion the 2008 economic crisis.

…click on the above link to read the rest of the article…

The Fed Can’t Raise Rates, But Must Pretend It Will

November 2, 2015

The Fed Can’t Raise Rates, But Must Pretend It Will

Waiting for Godot is a play written by the Irish novelist Samuel B. Beckett in the late 1940s in which two characters, Vladimir and Estragon, keep waiting endlessly and in vain for the coming of someone named Godot. The storyline bears some resemblance to the Federal Reserve’s talk about raising interest rates.

Since spring 2013, the Fed has been playing with the idea of raising rates, which it had suppressed to basically zero percent in December 2008. So far, however, it has not taken any action. Upon closer inspection, the reason is obvious. With its policy of extremely low interest rates, the Fed is fueling an artificial economic expansion and inflating asset prices.

Selected US Interest Rates in Percent

Selected US Interest Rates in Percent
Source: Thomson Financial

Raising short-term rates would be like taking away the punch bowl just as the party gets going. As rates rise, the economy’s production and employment structure couldn’t be upheld. Neither could inflated bond, equity, and housing prices. If the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble.

This is the reason why the Fed would like to keep rates at the current suppressed levels. A delicate obstacle to such a policy remains, though: If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.

To prevent this from happening, the Fed must achieve two things. First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.

…click on the above link to read the rest of the article…

 

Yes, We Have No Bananas–or Rate Hikes

August 20, 2015

Yes, We Have No Bananas–or Rate Hikes

The world’s most powerful central bank is relying on a novelty tune to maintain the hyper-speculative status quo.


Back in the Roaring 1920s, a novelty song entitled Yes! We Have No Bananas (1923) was a major hit. The song made fun of a fruit vendor who answered “yes” to every query–even when he didn’t have the requested item–for example, bananas.

Today, in the Roaring Teens, the Federal Reserve has their own novelty tune:yes, we have no rate hikes.

Just like the always-positive fruit vendor in the 1920s who answered “yes” to every question, the Fed answers “yes” every time someone asks if they are indeed going to raise interest rates a smidgen.

Despite their automatic affirmative, we have no rate hikes. The reason why, oddly enough, goes right back to banana vendors–in this case, banana vendors in China, who are speculating on margin (i.e with borrowed money) in China’s casino stock market.

The reason why the Fed is wary of raising rates isn’t the real-world impact. As I have noted here many times, a quarter-point increase won’t torpedo any auto loan or mortgage being issued to qualified buyers.

If a buyer can’t qualify for a home loan because rates clicked up .25%, they have no business buying a house anyway–they are not qualified by any prudent lending standards.

As for subprime auto loans–the firms issuing these loans don’t care if rates click up .25%–the subprime market world of high rates and high fees is unaffected by a tiny uptick in rates.

Who’s affected by a meager .25% uptick? Speculators: every speculator from the banana vendors on the street to hedge funds gambling billions in foreign exchange markets is exposed to massive tidal forces unleashed by higher rates in the U.S.

 

…click on the above link to read the rest of the article…

Janet Yellen’s clout today is especially hefty: Don Pittis

June 17, 2015

Janet Yellen’s clout today is especially hefty: Don Pittis

The sense that change is afoot lends power to the U.S. central banker’s words

If you live in a cave and survive on nuts, berries and the odd roasted squirrel, what U.S. Federal Reserve chair Janet Yellen says today won’t make much difference to your life. At least not right away.

But for the rest of us, from Saskatoon to Shahjahanpur, what she says will matter. The powerful Yellen may talk softly, but she carries an enormous stick.

Of course the U.S. central bank always has a certain amount of clout. But there are reasons that Yellen’s pronouncements today on interest rates may be more newsworthy than usual.

The first thing is the way Yellen’s message will be presented. Even when the Fed issues a written statement, market analysts go over the wording with a fine-toothed comb, interpreting subtle changes in wording.

Like the printed statement, Yellen’s speech will also be carefully penned, but emphasis can lend special meaning to a prepared text.

Most revealing of all is the question and answer period, when Yellen stands up and, in the glare of camera lights, faces the slavering wolves of the financial press who will try to tempt her into tiny indiscretions.

Adding to the import of today’s speech and news conference is the timing. It may be an illusion, but it feels as if the world is currently on the knife edge of change, what mathematicians call an inflection point, where things, once trending one way, suddenly begin trending another.

In the fullness of time we may find out we were wrong, but today part of Yellen’s impact will be the sense that change is afoot.

…click on the above link to read the rest of the article…

Bank Of America Begins 66-Day Countdown Until The Terrible Ghost Of 1937 Returns

June 16, 2015

Bank Of America Begins 66-Day Countdown Until The Terrible Ghost Of 1937 Returns

In 66 trading days on September 17, 2015, the Federal Reserve will, according to Bank of America, hike rates for the first time since 2006, which according to BofA will “end the era of excess liquidity.”

We disagree entirely, but let’s hear what BofA’s Michael Hartnett has to say:

On September 17th the Fed will hike the Fed funds rate by 25bps according to Ethan Harris & our US economics team, the first hike since June 2006. 

Recent US economic data support this view, in particular the solid May payroll & retail sales reports. Note that after a Q1 wobble, one of our favorite cyclical indicators, US small business confidence, has also bounced back into expansionary territory. Ethan Harris forecasts 3.4% US GDP growth in Q2, after 0.2% in Q1, and US rates strategist Priya Misra forecasts a Fed funds rate of 0.5% by year-end, and 1.5% by end-2016. Like Ethan & Priya, the futures market also looks for a modest Fed tightening cycle: Eurodollar futures contracts are currently pricing in 3-month rates in the US rising from 0.01% today to 0.65% by year-end, and to 1.54% by end-2016.

Yes, the US economy is so strong the Bureau of Economic Analysis has tofabricate double seasonal adjustments to goalseek GDP data that is non-compliant with the narrative. As for economists being wrong about a rate hike, or overestimating future US growth, let’s just say it won’t be the first time they are wrong…

Still, one thing BofA is right about: this time the normalization process will be different.

 

…click on the above link to read the rest of the article…

More Central Banking Lunacy

June 9, 2015

More Central Banking Lunacy

US Rate Hike: The Back-Pedaling Brigade

Last week’s payrolls report was “stronger than expected”, which should actually be fairly meaningless, given how many times it will be revised and considering that it is a lagging economic indicator. However, in light of the Fed’s absurd employment mandate, it does slightly increase the chances of a token rate hike at some point this year.

Christine-Lagarde-EU-IMFIMF chief Lagarde – a political operator and bureaucrat since 2005, thinks monetary policy should remain as loose as possible. No-one seems to really know why.

Photo credit: Reuters

To this it should be noted that whether the Federal Funds rate is or isn’t 25 basis points higher shouldn’t make much difference either, but it would certainly have some symbolic significance if the Fed were to move away from its current zero interest rate policy. In the meantime, the broad US money supply TMS-2 has most recently recorded an approx. 7.8% year-on-year growth rate, which remains a historically very high level. Only in the context of the ever wilder oscillations since the Nasdaq bubble blow-out in 2000 can it be considered a “middling” rate of money supply growth:

1-TMS-2The broad US money supply aggregate TMS-2 (true money supply) is growing at 7.8% y/y at last count – click to enlarge.

Given that the Fed has stopped “QE” and its balance sheet growth has turned slightly negative, current money supply growth is the result of credit creation by commercial banks – especially industrial and commercial loans are essentially back at typical boom growth rates. Most recently they clocked in at a rate of 12.45% annualized.

…click on the above link to read the rest of the article…

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