Apparently Jay Powell did not take my advice. The FOMC has decided to boost the federal funds rate 25bps.
The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.
Powell is pretending the past two weeks never happened.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
Now let's see how the banks deal with the new rate. Has Powell triggered a new banking crisis?
The Fed has to continue to raise rates. In the 80s the Fed Funds rate was over 19%, we are currently at 5%. The trillions in wasteful spending is the problem. This is going to take years to dissipate. Powell can't ignore inflation. American's have more personal debt than ever in history of our nation. Credit card debt is close to a trillion dollars. According to Lending Tree the average car loan is over $700 with many over $1000 a month. Many are seriously underwater and stuck with high interest loans. Imagine those that just bought a house 18 months ago and a new car. Now, they get laid off, who pays the bills? Defaults will be in full swing by Q3. Powell has to keep fighting inflation, I look for another hike at the next meeting in 2 months. There will be no cuts this year despite what people want. Things are much worse than the average citizen realizes. Layoffs will widen and inflation will continue to crush the people. Looking for someone to blame? Who do you really think is responsible for the current economic situation?
The problem is that the interest rate hikes aren't fighting inflation because the interest rate hikes aren't even happening.
Powell raised the Federal Funds rate in November and December of last year, and Treasury yields DROPPED. They rose briefly after the February 1 hike only to crater over the past two weeks, while the market reaction to yesterday's federal funds hike was to push yields down even further.
How can we have interest rate increases when Treasury yields are lower now than at any time since last September?
Broadly speaking, the banking system is sound. If banks focus on raising some capital so they can wall off their HTM portfolios, there will be no bank runs.
Which is about the reaction I expected. The markets have signaled they don't want rates higher than where they are. Pretty much makes the fed funds hike useless.
Here’s what I think is being underestimated: consumer unease.
There’s probably all kinds of studies correlating ‘fear’ with ‘sell off’. Buy how do you quantify ‘unease’? Every friend I spoke with this past week said they considered taking money out of their bank accounts -‘just in case’ of a bank run. No one did, so there are no actions to quantify. But the majority of Americans feel that they absolutely cannot afford to lose their savings in a bank run, and this festering unease about ‘what the heck is going on’ could be triggered into actions very, very rapidly by the least little event.
And these ten gazillion dollars worth of derivatives! There are maybe 100 people in the whole world who understand the algorithms involved, and they all have PhDs in math. So the ‘unknown’ aspects of the derivatives add to the ‘unease’, even in the professional financial jobs. It’s all too precarious!
Mr. Kust, I would appreciate an entire column devoted to how these derivatives fit into the big picture, if you’re interested....
Indeed: at 61, I have left the world of naivete far behind. No longer a subscriber to the lame theory of coincidence, my brain connects dots. Big ones. Obvious ones, most of them.
Gone are the times i would attribute to incompetence that evil which is attributable to malice.
There’s a plan all right. And we Chinadians are stuck in its midst.
Does Powell have any clue what he’s doing?
I doubt it.
The Fed has to continue to raise rates. In the 80s the Fed Funds rate was over 19%, we are currently at 5%. The trillions in wasteful spending is the problem. This is going to take years to dissipate. Powell can't ignore inflation. American's have more personal debt than ever in history of our nation. Credit card debt is close to a trillion dollars. According to Lending Tree the average car loan is over $700 with many over $1000 a month. Many are seriously underwater and stuck with high interest loans. Imagine those that just bought a house 18 months ago and a new car. Now, they get laid off, who pays the bills? Defaults will be in full swing by Q3. Powell has to keep fighting inflation, I look for another hike at the next meeting in 2 months. There will be no cuts this year despite what people want. Things are much worse than the average citizen realizes. Layoffs will widen and inflation will continue to crush the people. Looking for someone to blame? Who do you really think is responsible for the current economic situation?
The problem is that the interest rate hikes aren't fighting inflation because the interest rate hikes aren't even happening.
Powell raised the Federal Funds rate in November and December of last year, and Treasury yields DROPPED. They rose briefly after the February 1 hike only to crater over the past two weeks, while the market reaction to yesterday's federal funds hike was to push yields down even further.
How can we have interest rate increases when Treasury yields are lower now than at any time since last September?
[The U.S. banking system is sound and resilient. ]
But of course.
Echoes of 2005 in my ear...
And 2006.
And 2007.
And... oops!
Broadly speaking, the banking system is sound. If banks focus on raising some capital so they can wall off their HTM portfolios, there will be no bank runs.
The Fed raises a rate and markets lower rates.... hmmm
Looks like the 2-Year Treasury yield dropped on the FOMC announcement.
https://www.cnbc.com/quotes/US2Y
The 10-Year took some time to think about it first but it still went down.
https://www.cnbc.com/quotes/US10Y
Which is about the reaction I expected. The markets have signaled they don't want rates higher than where they are. Pretty much makes the fed funds hike useless.
Here’s what I think is being underestimated: consumer unease.
There’s probably all kinds of studies correlating ‘fear’ with ‘sell off’. Buy how do you quantify ‘unease’? Every friend I spoke with this past week said they considered taking money out of their bank accounts -‘just in case’ of a bank run. No one did, so there are no actions to quantify. But the majority of Americans feel that they absolutely cannot afford to lose their savings in a bank run, and this festering unease about ‘what the heck is going on’ could be triggered into actions very, very rapidly by the least little event.
And these ten gazillion dollars worth of derivatives! There are maybe 100 people in the whole world who understand the algorithms involved, and they all have PhDs in math. So the ‘unknown’ aspects of the derivatives add to the ‘unease’, even in the professional financial jobs. It’s all too precarious!
Mr. Kust, I would appreciate an entire column devoted to how these derivatives fit into the big picture, if you’re interested....
I'm hoping the bank meltdowns have ceased for now, so I can work on the longer view and delve into some of these issues.
The Fed’s boy Powell is no more than an arsonist posing as a firefighter.
I was thinking little kid playing with matches, but yeah.
S&P +10% into EOQ. Trust the Plan.
That presumes there is a plan.
I am not convinced there is one
Indeed: at 61, I have left the world of naivete far behind. No longer a subscriber to the lame theory of coincidence, my brain connects dots. Big ones. Obvious ones, most of them.
Gone are the times i would attribute to incompetence that evil which is attributable to malice.
There’s a plan all right. And we Chinadians are stuck in its midst.
Stay frosty. We'll be under 1200 before Flag Day.