Powell Joins Four-Rate-Hikes-in-2018 Chorus, Markets Tank

Markets are still in denial about the increasingly hawkish Fed.

No, the Fed is not going to hike rates by half a percentage point at each meeting, and it’s not going to hike rates via secret teleconferences in between meetings to spring a monetary shock on the market, and it’s not going to hike rates by one full percentage point per meeting, as it had done in November 1978, in October 1979, in February 1980, and four times in a row between September 1980 and May 1981. And it’s not going to drive the federal funds rate above 19%. Nope. Those days are gone. “Hawkish” in those days meant something different. Those were the Volcker days of cracking down on double-digit inflation.

When we talk about a “hawkish” Fed today, we mean the “gradual” removal of accommodation, as it’s called, in baby steps, doing in an entire year what Volcker accomplished in a single meeting, namely raising its target range for the federal funds rate four times, 25 basis points each, for a whopping total of one percentage point in 2018. That’s “hawkish” today, after years of ZIRP and QE.

Many on Wall Street had still been stuck on two rate hikes this year, even though the Fed had signaled in December that there would be three hikes this year.

But today, Jerome Powell, during his first semi-annual testimony as Fed Chairman before the US House of Representatives’ Financial Services Committee, joined the chorus of those Fed governors who’re open to four of these tiny rate hikes in 2018. He wasn’t the first to do so publicly, but he’s the most powerful among the FOMC members.

His prepared remarks were about how strong the economy is, that the Fed would stick to its path of “gradual” removal of accommodation, and that it would “continue to strike a balance between avoiding an overheating economy and bringing … price inflation to 2% on a sustained basis.”

After his prepared remarks, he was asked what would cause the Fed to hike more than the three times the Fed had penciled in for 2018 at the meeting in December. And off script, he opened the door to a fourth rate hike. This is what he said:

“You’re right that every quarter, every participant in the FOMC submits a projection of what they feel is going to happen to the economy and also their projection for appropriate monetary policy. And at the December meeting, the median participant called for three rate increases in 2018.

“Now since then – we will submit another projection, all of us, in three weeks – but since then, what we’ve seen is incoming data that suggests that strengthening in the economy. We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target.

“We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative.

“So I think each of us is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting, and I wouldn’t want to prejudge that.

This is how the Fed wants to prepare the markets. The old days of administering a “monetary shock” to get a point across are long over. Now it’s all about “forward guidance.”

And when it became clear today that Powell joined the chorus of Fed governors that are open to four of these tiny rate hikes in 2018 and that the QE Unwind will proceed as planned – “I like our current plan,” he said when pushed about the need to speed up the QE unwind – the markets had a small hissy-fit.

The Dow dropped nearly 300 points. The S&P 500 dropped 1.3%. Treasury bonds fell, with yields rising across the yield curve. The two-year yield hit 2.27%, the highest since September 2008. The 10-year yield bounced back to 2.9% at the close. The dollar rose, with the WSJ Dollar Index reaching the highest level since February 9.

But financial conditions, though they have tightened somewhat recently, remain very easy. The costs of borrowing money, even for junk-rated companies, remain very low. Risk premiums are minimal. Excess liquidity is still trying to find a place to go. Investors are still chasing yield. And it will take the Fed a long time at the pace it is going – barring the application of a surprise “monetary shock” – to persuade the markets that it is serious about the end of super-easy money.

Surging home prices have primed the housing market for this. Read…  What will Spiking Mortgage Rates, High Home Prices, & the New Tax Law Do to the Housing Market?

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  83 comments for “Powell Joins Four-Rate-Hikes-in-2018 Chorus, Markets Tank

  1. Frederick says:

    Volcker wasn’t a worm like the people running the FED nowadays

  2. Robert says:

    Almost a decade of ZIRP, followed by painfully SLOW tiny incremental increases.

    This is Hawkish ? Yeah, right.

    Normalization right after the so-called financial meltdown would have been preferable, and beneficial too.

    Your closing paragraph is right on — to which I would add this, “Too little too late”. Nuff said .

    I don’t know what this is — but HAWKISH it is not.

    • James Levy says:

      I don’t think that they ever had a chance to normalize the system after 2007-09, because the system was broken. It’s a poor analogy, but it is like having a patient with a wound that cannot stop bleeding: the only way to keep him or her alive is to keep giving them transfusions. Stop the transfusions, and the patient dies.

      The entire financialized system is designed to suck money to the investor class and its functionaries, the banks and brokerage houses. The system is now buttressed and guarded by immensely powerful people and their factotums. Everyone listens to these people, is overawed by them, and can’t imagine a world without them. Call them Republican or Democrat, Mnuchin or Geithner, Adelson, Bezos, Zuckerberg, or Mercer, these people rule the roost. They will do whatever they can to insure their continued wealth and power. And that precludes taking any steps to “normalize” our economic system.

      • HowNow says:

        Thank you, James, for introducing a new word (for me): “factotum”. And it fits that sentence well.

        I know people are enraged by what they see in FED governance and the fact that Congress is owned outright by special interests. But… the Fed had to move to QE, and its various iterations, to revive a flat-lined economy and avoid a deflationary cycle. Now that assets have ballooned, they’re not so quick to restore normalcy. But, consider that they were doing what they could, since Congress was trying its damnest to destroy Obama’s Presidency – fighting deficit spending – while a Democrat was at the helm. Now it doesn’t matter anymore, since a Republican is in office. But the FED was in emergency overdrive for several years. Blaming them now is unfair – they do not want to initiate a collapse of the bond and stock markets with dramatic liquidity reduction. So, if you like Volcker, you need to remember that he was detested for years while his policies were doing their work. Are we doing the same with a FED now moving in the opposite direction?

        • Bobber says:

          So you are saying the unelected Fed should take over the job of legislators?

        • Kent says:


          in 1929, the legislators were in charge after the stock market crash. They were clueless about how an economy really works and immediately sent the country into the Great Depression.

          Had the Fed not stepped in at the end of GWBs term, Obama would have been stepping into the same situation, only this time he would have been blamed for a world-wide Great Depression. He would have lost the election in 2012 to someone like Bernie Sanders who would begin emulating FDRs policies from the 1930s.

          Whether one likes or dislikes Bernie’s positions, there would have been a whole lot of pain. The Fed’s actions allowed us to avoid that pain in the first place. Unfortunately its the only system we have.

        • van_down_by_river says:

          It’s NOT “unfair” to blame the Fed. You’re not going to revise history if I can help it.

          The Fed created three enormous asset bubbles over a relatively short time frame.

          The Fed enabled the government to run up huge deficits.

          The Fed has actively destroyed the purchasing power of our currency.

          Their was no economic reason to implement QE3. The monetary system was no longer in danger of collapse and the credit markets were not freezing. The only reason QE3 was implemented was to garner popularity from wall street and the investor/speculator class – and it has paid off handsomely for Ben (Coward) Bernanke.

          Ben has been given a figure head position at a high frequency trading hedge fund where it gets paid millions to do “research”. A HIGH FREQUENCY TRADING FIRM – are kidding me!!!!! “blaming them now is unfair”, come on!!!! Prosecuting them now would be fair.

          BTW Volcker was not widely detested at the time, he was lauded for doing what was necessary – I can see you love to reinvent history. I was in high school at the time and working nights as a short order cook and doing just fine. I was grateful to Volcker for saving my paycheck from the death spiral begun by LBJ and W. M. Martin.

        • HowNow says:

          To Bobber and Van_by_the_river:

          No I said nothing about elected vs non-elected govt. officers/postions.

          Here’s a bio on Volcker. https://www.thebalance.com/who-is-paul-volcker-3306157 After working at the FED, he became a CEO of an INVESTMENT firm. Horrors!! In that bio description, you may take note of the fact that the FED has frequently made mistakes on policy. Even Volcker made mistakes while in office.

          Here’s a quote from a NY Times article from 1982 about Volcker’s “popularity” in Congress, coming from Paul Volcker himself: “”There is a great effort by Congress,” he told Volcker at the committee’s semiannual hearing on monetary policy last July 20, ”to pass the buck to you. You are one of the favorite topics of speeches by congressmen and senators of both parties: ‘If only we could get that damn Paul Volcker to do something, all this would go away.”

          Fake news? Rewriting history? ? People in glass houses…

      • Robert says:

        Perfect comment response. Thank you.

        In passing, I will note that my comment specifically said this, “so-called financial meltdown” . Meaning that I did not (at the time, and still now) agree with the need for such massive intervention. Letting the miscreants suffer and fail was the appropriate remedy.

        Would that we could bold, or underline or italicize comment content. I would have bolded the “so-called” modifier in my comment. Perhaps an informed commenter could be allowed the judicious and sparing use of HTML tags in some future release of the Wolfstreet comment steam ?

        • Dan Romig says:

          Robert, your statement, “Letting the miscreants suffer and fail was the appropriate remedy.” is absolutely spot-on!

          When Lehman Brothers and Wall Street’s MBS purveyors became over-leveraged and insolvent, they deserved the same fate as any other business that was bankrupt. Lehman Brothers was let to die, but that was basically it. Instead, for example, we got two trillion dollars worth of secret and free lending from the Fed to Citigroup (2.513 T), and for what?

          So many members of the global banking cartel are serial felons, and the Fed has propped them up; while the Justice Department made them pay fines, but nothing, including their behavior has changed. Now we’re in this ‘new normal’ of crazy economics when we should have allowed the so-called free market to wipe the slate clean and get a fresh start.

      • Jim H says:

        Nice succinct summation of things. I particularly liked your conflation of “Munchkin” & Tim G. As I remind friends, both represent “them”, not us

      • d says:

        “I don’t think that they ever had a chance to normalize the system after 2007-09, because the system was broken.”

        What “Broke the system” Was QE. A system, base in QE, is DOOMED, unless changed.

        If you remove what QE Injected, then, as time passes, a non QE Environment. Will become the “New Normal” just as the QE Environment did.

        Your problem sin this are taht at the moment the Eu and particulalrly china have no interest in Ending Their QE as it Advantages them Against the US/Rest, and the Political Classes/Dictators in those States.

  3. Petunia says:

    Powell was asked about the interest on excess reserves. It seems it’s illegal to pay more than the federal funds rate, and he is paying 1%+ over that rate. He seemed taken aback by the fact, interesting.

    • Wolf Richter says:


      I’m not sure what you saw, but here is the deal on interest on excess reserves (also look at the linked article… it has the charts and a lot more details):

      “When the Federal Open Markets Committee (FOMC) meets to hash out its monetary policy, it also considers what to do with the interest rates that it pays the banks on “Required Reserves” and on “Excess Reserves.” In this cycle so far, every time the Fed has raised its target range for the federal funds rate (now between 1.25% and 1.50%) it also raised the interest rates it pays the banks on “required reserves” and on “excess reserves,” which went from 0.25% since the Financial Crisis to 1.5% now.”


      It’s not illegal. However, the Fed is paying banks a fortune on these excess reserves…. 1.5% on $2.2 trillion. This is money that the Fed then does NOT remit to the Treasury as part of its annual remittance. And therefore it’s a wealth transfer from the taxpayer via the Fed to the banks.

      • p coyle says:

        can they raise the fed funds rate and not raise the interest on excess reserves in tandem? i don’t understand the intricacies of fed policy! ;-)

        • Wolf Richter says:

          Yes, they can. The Fed is not required to pay interest on excess reserves.

          I think that’s where part of the questions came from in Congress: Why is the Fed doing this? Why will it pay 2.5% in interest by year-end on $2.2 trillion in excess reserves, to the banks for doing nothing? Some people, including yours truly, find this outrageous.

        • p coyle says:

          thanks, wolf!
          perhaps some intrepid candidate will campaign on this issue and bring up in the public sphere this giveaway to the banks. not holding my breath on that one, however.

      • C Jones says:

        Hi Wolf,

        They could stop paying interest on excess reserves but then the monetary policy implementation mechanism would be broken.

        The question in such a scenario is quite simply:
        -Who, and and what rate, would borrow large amounts of overnight money?
        The answer is: no-one.

        If you create a huge imbalance in the reserve market (by the quasi-permanent process of QE) the price of reserves (ie. the interest rate) goes to zero. Until that structural imbalance is removed (and we are miles from that point) the central bank must become borrower of last resort in order that overnight rates trade above 0%.

        Generally, in a global perspective, todays monetary policy implementation mechanism works thus:
        1-create a structural demand for reserves via a legally enforced ‘reserve obligation’ (eg. fulfil an average of Xbn over Yweeks).
        2-provide the funds these institutions require to fulfil this through some kind of market operation (usually a repo operation, usually short term, usually at the base rate)
        3-provide a backstop lending and borrowing facility so that overnight interest rates on any one day cannot spike up or down too far.
        4-provide a fine tuning operation on the last day of the reserve period in case you get the calculation in pt1&2 wrong.

        It works as a concept because same day ‘money’ cannot enter or leave the financial system by any other route than via the central bank (sure the govt can also do this, but most govts outsource mon pol – especially mon pol implementation – to the central bank).

        It works in maintaining overnight interest rates at a desired level (outside of QE times) because on any one day a firm does not know the aggregate suuply&demand situation w.r.t. reserves. All they know is that, over the entire reserve period, demand will equal supply and therefore rates will be centred on the target rate.

        It may seem unfair / unjust, but in times of QE if you didn’t do this then banks would earn the target rate just on their reserve obligation portion and everyone else would get 0% market interest rates. In some sense that seems even more unjust.

        Anyway, sorry for the distraction

      • Petunia says:

        I watched the portion of the hearing I was referring to, here’s an article at WSJ.COM on the exchange:

        Fed’s New Interest-Rate Tools Don’t Sit Well With Rep. Jeb Hensarling

        The congressman read the statute to Powell and Powell came up with a convoluted answer as to how they arrive at the rate for excess reserves, but the point was that it was illegal to pay more than the federal funds rate. Powell never addressed the law, only talked about all the hoops the fed jumps through to come up with a rate. He said they use a mix of money market rates, commercial paper rates, etc.

        • Wolf Richter says:

          I see what you’re saying. Thanks.

          I guess the problem is that the fed funds rate is a market rate and fluctuates. The Fed is trying to keep it currently between 1.25% and 1.5%. Yesterday it closed at 1.42%. But the Fed is paying the banks a fixed rate, currently 1.5%. And that fixed rate exceeds the Fed funds rate, currently by 8 basis points, but sometimes by as much as 25 basis points.

          If this is illegal, that’s an interesting development for sure.

      • I M says:

        One might speculate the overage on excess reserves is an incentive (or the actual funding mechanism) to the banks to begin raising yields on interest bearing consumer cash accounts. If the taxpayer is footing this bill then banks might be willing to trickle down a pittance of this money to their customers, otherwise banks will probably hold yields down as long as possible while the Fed normalizes at a snail’s pace. The wealth transfer is actually circular in this case and more akin to a wealth redistribution.

        I suspect this Fed is very concerned about consumer debt levels vs consumer cash holdings and wants to encourage savings and siphon off some risk. If interest on savings accounts improve then consumers might think about putting their tax refunds in these accounts rather than Tesla stock.

      • What you are calling payment on excess reserves is RRPO. The Fed pays for the rate hikes which is why they are in no hurry to jump the number. It allows the Fed to provide liquidity and raise rates at the same time. Mogambo Guru http://www.mogamboguru.com/ used to report on these numbers. The Fed now buries the evidence of this old policy tool in their boilerplate (lack of transparency) and it all has a name. Petunia is right, its outrageous to consider not only what they have done but what they plan to do if they follow through, which in turn may be why the markets do not believe the Fed.

      • Nick says:

        And this is exactly why the conspiracy theories are conspiracy fact……….America lost its liberty in 1913 with the creation of the FED. The FED is doing exactly what it was designed and created to do……..funnel money/wealth into the hands of the private banking family elites who run this world/country.

        • Timthetiny says:

          I suggest you check the dates on the gilded age and get back to us.

          As if the fed is enabling greed any differently.than the Romans practiced it.

  4. van_down_by_river says:

    I believe the reason the Fed cannot persuade the markets that it is serious about the end of super-easy money is because market participants can see the government needs super-easy money to fund its deficits.

    Am I incorrect in assuming the Fed will buy any future government debt that is not absorbed by the market? I can’t imagine a world where the Fed would not immediately call up the primary dealers and tell them to buy if there were to be a weak auction. What if the 10 year went to 5% in a day – the Fed would have to run in and buy to bring rates back under 3%.

    Increased deficit spending is simply printed money that flows out into the economy and heavily into assets. The enormous Trump deficits should increase asset inflation and the Fed will monetize the deficits because that is what they do.

    A couple weeks ago I thought the Fed would at last let the market flush stocks down the crapper – this was pure delusion on my part. The only asset the Fed will flush down the crapper is the U.S. dollar. The tidal waves of liquidity just keep crashing on shore, it’s gone on so long it’s hard to see how it will ever end.

    After the dollar is dead it will seem so obvious in hindsight.

    • raxadian says:

      What these people don’t seem to get is that the US currently needs a stronger dollar and the only ways to do that fast is to cut federal expending, print less money and raise rates.

      The easiest to do is to raise the rates, even in baby steps.

      QA unwind is going painfully slow but it also helps a bit with the “print less money” bit.

      Cut federal expending? Just take a look at the news, the current US president is doing cuts with one hand and “gifts” with the other, so that part is not doing well at all.

      2018 is the year the dollar has to rise. Is that just that hard to get? That the price of the infamous zero interest rates needs to be paid somehow?

      That the US government needs money to cover the tax cuts and subsidies?

      Green is good.

    • Mike Ra says:

      Please explain to me how: “Increased deficit spending is simply printed money that flows out into the economy …”


      • Bobber says:

        Government runs deficits. Government issues new debt to public to fund those deficits. The Federal Reserve buys that debt from the public by “printing” money (i.e., by issuing electronic money to banks, a.k.a. reserves). Federal Reserve keeps that purchased debt as an asset on its balance sheet forever.

        The net result is the deficit spending is funded by newly issued money.

        • Thomas R Kauser says:

          Half the assets on the balance sheet are private mortgage obligations and the Fed had a chance to sell the mortgages and bag massive profits and get paid to play? But alas the changeover and the tax cut and all the new spending , the Fed must have let the balance sheet slip their over developed EGO’s?

        • Steve says:

          The vast majority of public issue government debt is bought and held by the the public. The rather small amount held by the FR (hence booked to their BS) would constitute an increase in the money supply as the created cash would flow to the Treasury for spending. Correct?

          The amount funded by the actual public would reduce existing money supply temporarily as this money would flow to the Treasuryfor later spending.

          Or are you suggesting that the FR buys all the new issue debt?

          Clarification please.

        • Mike Ra says:

          The US Government doesn’t have to run a deficit for what you are describing. The Fed could buy existing debt.

          Your answer is correct of QE but in non-QE times, deficit spending by the government is not with printed money; at least not by the Fed.

        • d says:

          “The Federal Reserve buys that debt from the public by “printing” money (i.e., by issuing electronic money to banks, a.k.a. reserves). ”

          Sometimes, and it dosent buy it all, so your position is far from accurate.

    • Kent says:

      “Am I incorrect in assuming the Fed will buy any future government debt that is not absorbed by the market? I can’t imagine a world where the Fed would not immediately call up the primary dealers and tell them to buy if there were to be a weak auction.”

      The Primary Dealers are always obligated by law to purchase any unsold bonds. And they always have the money to do so. When you come to understand how they always have the money, you get to understand how the economy really works.

  5. Mvrk says:

    Drop a frog in a pan of boiling water and it instinctively jumps out and saves itself. But slowly turn up the heat and the frog eventually cooks to death. Volcker equals former scenario, Powell equals latter scenario.

  6. Bobber says:

    The Fed seems to be getting specific about interest rate increases. I don’t recall the Fed getting so specific about interest rate declines over the past decade. Does anybody recall how the Fed messaged the lower rates, and whether it stuck to its message? It could indicate how serious the Fed is when it announces a plan.

    • d says:

      This is a new FED Head (appointed by an insane POTUS, out of cycle). Not a replacement robot.

      So there is a learning curve, when the new head says spade, does he actually mean spade, or does he mean shovel.

      Various market players are still testing to see if he can be Bullied/Spooked by their actions.This will go on for a few FOMC meetings until everybody gets to know each other. Deja vu.

      • Smingles says:

        “This is a new FED Head (appointed by an insane POTUS, out of cycle). Not a replacement robot.”

        I really don’t know about that.

        Powell was nominated to the Fed Reserve Board of Governors in 2011 by Barack Obama. It’s not like he’s unfamiliar with the place, or like he’s some zany wildcard appointed by Crazy Don.

        Powell is “Yellen in a pair of trousers and a tie.”

        According to Bloomberg, a survey of economists in 2017 estimated that Powell was more dovish than the average member of the Fed Board of Governors.

        These narratives– that Powell is going to shake up the place by being more hawkish– are fun to talk about, but probably not realistic.

      • You may be half right, I think Yellen was trying to give him some working room. This Fed has all the elements for a real inside struggle. Including new appointments. The Fed is or will be irrelevant, like the department of Labor, remember when that was important? Treasury does the heavy lifting
        and has since 07. Next time off balance sheet. Congress can’t say much about that.

  7. kiers says:

    So…this means the short term rate goes to ~2.5% by year end, and that leaves the yield curve with only a 2% greater differential till the 10 year forces up against the “goldman limit” of ~4–4.5%!

    historical real 10 yr yields, here: https://www.ft.com/content/4308af52-1635-11e8-9376-4a6390addb44

    History shows the economy hasn’t pushed past 0.75%-1% real yields for the past 4 1/2 years, meaning inflation implied in 10 year nominal yields averaged around 1.75%, the last 4 years (quite near the official “targets” of 2%….of which suddenly, post Trump, they found “more” inflation hiding in sofa cushions, so the much ballyhooed QT begins!)

  8. Night-Train says:

    The hubris of the current crop of business execs is something to see. They had access to almost free capital for most of a decade. But, anytime someone in an official capacity suggests rates might need to rise a smidgen to counter our low balled inflation rate, they have a hissy. Perhaps they fear that they might really have to produce to score the fat bonuses resulting from stock gains. Life can be so unfair!

  9. KPL says:

    I would reserve my judgement on what the Fed would do. It all boils down to what the market does. May be as early as March 4, Italy elections, it might well be tested.

  10. Memento mori says:

    The fed will come out with softer language as soon as the markets starts going down in a serious way.
    Greenspan put is alive and kicking.
    Mr. Market knows it and it will continue its upward march to 30k by this summer.
    The fed has no other reliable gauge for its actions other than the stock market.
    Stock market up, fed doing good job. Stock market down, fed doing bad job.
    My bet is on the “fed doing good job”

  11. Rates says:

    ZeroHedge pointed out that the Fed increased their balance sheet after the volapocalypse.

    They talk tough, but watch what they do.

    • Wolf Richter says:

      Whoever wrote this at ZH was wrong (they have many authors). Not many people have tried to really understand how this works and what data to look at. The QE Unwind is going like clockwork, Treasuries and MBS both, never missed a beat during the sell-off. I’ll do another update in a few days for the month of February, and you’ll see.

    • Max Power says:

      That article was rather misleading. The FED’s balance sheet moves in a zigzag pattern on a week-by-week basis. What’s important is the overall trend. You can’t focus on what happens in one single week, which is what that article did.

  12. KPL says:

    Europe is where the fun is!


    Is it possible that we have a situation where Europe and BoJ do QE4EVER and the Fed raises rates?

    • MC01 says:

      Jens Weidmann recently went the closest he’s allowed to openly calling for “aligning” monetary policies in the EMU to US ones, meaning killing off QE and starting hiking rates. Intriguingly enough he brushed aside the continous “faster than expected growth” mantra while concentrating on inflationary concerns: he didn’t go as far as saying that without unreported inflation most of Europe would be stuck firm in the same decade-long stagnation, but again that’s as close as he’s allowed to go on record.

      Weidmann is just the most recognizable name behind the growing brigade of Central European (chiefly Dutch and German) officials who have been asked for years to bite their tongues and avoid criticizing, at least publicly, the monetary policies originating from the Euro Tower for the sake of the “European project”.
      These men and women however have had about enough and they are growing restless. After being promised year after year the ECB was merely implementing emergency measures they are faced by a smug Draghi promising more or less eternal NIRP and a semi-eternal QE.
      Even worse, after being repeated ad nauseam profligate Italian politicians would mend their ways and start living within their means if only given enough time and breathing room they are confronted with not just more of the same, but by a complete betrayal of Italian bankers and economists who had sworn to be the agents of change if only they had been put in charge.
      And to add even more to their grievances, Spain has effectively become a headache almost as strong as Italy. The public debt has spiralled out of control, the pension system has effectively become insolvent, there’s hardly a week when a bank or conglomerate isn’t engulfed by a massive scandal and only Podemos’ well meaning but astonishingly bumbling leadership has so far saved all parts involved from having to deal with a determined EU-skeptic government in charge of the EMU’s fourth economy.

      That’s another headache for Angela Merkel to deal with after harder than usual negotiations to form a coalition government and the effective disintegration of the SPD, and again a headache largely of her own making.

      • JR says:

        Awesome comment. One mystery is, if you look at the charts at eurocrisismonitor dot com, the “ECB owes Germany” shows a continuous increasing balance. Now the total of Italy plus Spain plus ECB (!!) adds up to pretty close to 1T Euros (that is trillion). Seems out of control to me. Is the ECB trying to offload some of the Italy and Spain load onto its own books???

    • d says:

      “Is it possible that we have a situation where Europe and BoJ do QE4EVER and the Fed raises rates?”


      Is it possible that we have a situation where Europe does QE untill the EU/EUR implodes as the Fed raises rates?

      The EU has had over a decade to sort french and club med baking (Part of the rationale behind QE). All they have manage to do is rob some Russians in Cyprus.
      Apart from that IT HAS NOT HAPPENED
      Draghi only interested in what is good for his MAFIA MASTERS IN CLUB MED not what is good for the whole EU.

    • Wolf Richter says:

      Even under Draghi, the ECB cut back from €85 billion a month in QE to just €30 a month. This will likely go to zero by the end of the year or early next year. Don’t over-read the headline of the linked article. The article itself doesn’t say what the headline says.

      In 2019, Draghi will be out, and Bundesbank president Jens Weidmann will likely run the ECB. Weidmann has been advocating to stop QE for a long time and is unlikely to restart it once he gets the job.

    • Frank Herrmann says:

      “Is it possible that we have a situation where Europe and BoJ do QE4EVER and the Fed raises rates”

      This is a very good question . Who buys 10 year bonds at 0.75 % rate when you can buy US Treasury 2,94% ??

  13. Cameron S says:

    The stock market has not “tanked” yet. The S and P 500 index is still sitting way above the 200 day moving average and well above the 100 day moving average.

    The Stock Market is way over valued and has been way over bought and history tells us that there will be a very severe correction which is well over due. The warning shots have been fired and some are maintaining we are now at the beginning stage of a bear market. That still remains to be seen.

    Virtually ALL of the talking head experts have been completely wrong about the affect of increases in interest rates so far and timing. But they may be correct eventually because numerous market predictions or economic predictions can come to play in the longer term. Then they will claim they were right.

    After the FED dropped the funds rate to 0.25% in DEC 16 2008 and left it there for years the chorus of pundits argued that there could never be any significant rate hike or removal of QE without the stock market collapsing, the economy going into recession quickly and so on. Not only did they argue this but incorrectly maintained that the Fed would move to a negative Funds rate when it did the opposite. The Fed raised the funds rates FIVE (5) times between DEC 17, 2015 and DEC 13, 2017. With that the stock market continued to climb until the savage correction in 2018 a few weeks ago which has been very long overdue.

    Where it goes from here only God knows but history tells us that major move down is inevitable because these boom /bust cycles in stock prices always repeat themselves. It’s not different this time.

    You are a brave person if you are still holding onto stocks in this current environment,. But if you listen to the experts they will always tell you not to sell and this narrative has already begun. It happens with every significant move down in the market. It’s always time to buy with these sell side guys. So the pigs eventually get slaughtered as they will this time round. Of course they will all be told when the market eventually bottoms … “its the market, sorry every one is affected by this, no one could possibly have seen this coming, you have to invest for the long term and its time in the market that counts not timing the market.” 80% of them will fall for this horse manure as they sit on their massive losses – just watch.

    When the market does eventually truly tank, watch much of the proceeds from stock sales temporarily move into the bond market as it has before.

  14. raxadian says:

    The reason why there is so many complains around is that when your debt is in billions, even a 1% yearly rate hike is a disaster for your company if you live in the Red.

    So zombie companies and zombie unicorns sheed crocodile tears.

    And while there is still a lot of cheap credit, for these companies is just not cheap enough.

    There is no such thing as a free lunch.

  15. Drango says:

    The excess liquidity that is driving up stock prices probably originates overseas. The idea that the Fed raising or lowering rates a fraction of a per cent somehow tames or unleashes animal spirits is ludicrous. But the Fed’s belief in its own omnipotence is blinding it to the inevitable crash that is coming. It would be nice to know how the Fed is preparing for such an exogenous event, other than throwing money at the banks in a blind panic. But throwing money at the banks is basically why the Fed was created in the first place.

    • Wolf Richter says:

      The Fed raises rates to tighten “financial conditions.” That’s the stated purpose. This means that in a credit-dependent economy, credit gets more expensive and harder to come by, especially for high-risk entities. It also means, by definition, that bond prices decline (as yields rise). Tightening credit in a credit-dependent economy has a big impact and will eventually be reflected in asset prices and all kinds of other things.

      • Drango says:

        Wolf, I agree with everything you say, I just don’t think the the changes that Powell is contemplating will have much of an impact on economic growth. But the high-risk entities of which you speak are already living on the edge, and small changes in rates will definitely have a big impact on them.

        • Max Power says:

          The FED definitely has an effect. It’s enough for rates to go up a little bit more for the Buybacks Train (that’s been pulling the market these past few years) to come to a screeching halt. That may very well be followed by a market crash – regardless of how much overseas interest there is in the market.

      • KPL says:

        The problem is this…

        When tightening credits impacts asset prices, the Fed develops cold feet and abandons tightening. The reason could even be that if it continues it could have disastrous consequences.

        So it goes like this…

        Loosen credit/pump in liquidity->create bubble(say 3 times in 10 years)->tighten credit/suck liquidity->bubble bursts a bit->15% fall->get weak-kneed, Loosen credit/pump in liquidity->pump up the stock market

        Let us start with S&P of 100..

        100->400->340 (even this is greater than 10% CAGR for 10 years – when interest rates are nailed to the floor)->get jittery->pump money->take it to what?

        Can we call it a sane policy? Do you think this is what is Fed’s job?

        The sane thing to do is not to take it to levels (and pump your chest with “Courage to Act” and what not) that is disastrous. Allow the market to function. Act as the lender of last resort you are supposed to be and not the lender of first resort that seems to be the way of life at the Fed since Geenspan. These guys do think too much of themselves indeed. What did Greenspan think of himself when he started the whole thing…The savior of mankind?

        In short, this tightening act (against a falling market) needs to seen to be believed!

    • Mike Ra says:

      “But throwing money at the banks is basically why the Fed was created in the first place.”

      The Fed has served well through some periods of history since its inception. Take WWII and the 50’s. I agree that in recent times, your statement seems true. But I would contend that the Fed’s actions in recent times are as much a result of structural (and political) changes in the US economy over the past decades. I don’t believe the Fed is all bad. I think like any powerful organization there is good and bad. And if you eliminate the Fed system, what does anyone propose to replace it with?

      • Hirsute says:

        You don’t think the Fed is all bad? A group of unelected bankers that distort our free markets? The American economy did just fine from the early 1800’s to 1913 without the aid of the Fed.

        We could talk about 1873 or 1907, but America recovered and the creation of the Fed did not even address the banking excesses that led to those panics. Even the FDIC is an insolvent farce – it cannot cover the eventual losses to come from reckless fractional reserve lending married to proprietary stock trading under the same banking roof.

        • Kent says:

          Well, the panic of 1873 kicked of the “long depression” that lasted for nearly 20 years and ended gloriously in the panic of 1893. And, of course, another fun one in 1907. So it wasn’t so great.

          It was that history that caused the creation of the federal reserve in the first place. And the federal reserve replaced smaller, regional panics (those mentioned above) with the massive, nationwide panic that led to the Great Depression. So fixing one problem just kind of created a bigger one.

          But you are absolutely right, it can work with the right set of regulatory controls on the banking system.

        • Smingles says:

          “You don’t think the Fed is all bad? A group of unelected bankers that distort our free markets?”

          I always chuckle when people talk about our “free markets” as if they have ever existed.

          Or when they talk about the good old days of… the Gilded Age. Seriously?

        • Hirsute says:


          Drop the sanctimonious act. The Gilded Age was not a free market, nor did I suggest that it was or that we should return to it.

          Yes, there can be no absolutely “free” market just as there can be no absolutely “free” men (Jon Donne’s No Man is an Island…). That doesn’t stop us from extolling freedom in all of its forms and advocating for its advancement.

          Does the Fed give the individual more power or less? Decidedly less, I say.

      • Drango says:

        Mike, I don’t think the loss of manufacturing jobs over the last 50 years is only a structural change. The Fed has utterly and almost willfully failed to understand the role that overseas dollars have played in decimating manufacturing industries. Having trade deficits in the hundreds of billions is not something that just happens. It takes thousands of academic economists and a clueless media to justify it to the public. It also takes decades of incompetent leadership in the White House too.

      • Petunia says:

        I hate to be put in a position where I actually say something nice about the fed. But in the endless attempts to corner Powell by the congressional black caucus about why he wasn’t extending credit to blacks, raising the minimum wage, and helping employ more blacks, he didn’t say, “because that’s not my f’king job, that’s your job.”

        • Drango says:

          Petunia, it’s not the Fed’s stated job to prop up the stock market either, but the Fed’s response to the market’s taper tantrum proved otherwise.

    • Arnold Ziffel says:

      With the dollar weakening those foreign investments in the stock market erode the stock appreciation. At some point the foreign sovereign funds will turn to hard assets like commodities to protect against the declining dollar since commodities are tied to inflation.

  16. Mike Ra says:

    When the Fed talks about another .75 to 1% increase in short term rates this year, they are simply talking their book. They are not worried about inflation; although that is the easiest boogie man to conjur. They are not worried about inflation because: 1) They want inflation and 2) They know that inflation in today’s economy is self limiting (staglfation).

    So they want to normalize as much as possible but fully understand they will hit a wall at some point with respect to rates.

    Everyone on this thread seems very knowledgeable about things economic; paticularly field-based observations. Who among us thinks the US economy will continue just fine if the 10 year goes signficantly higher that 3% (e.g., 4 to 4.5%)?? I don’t.

    So yes, the stock market is inflated not only with QE monies but because there is little yield in today’s economy. The Fed wants to put a cap on this. Talking up interest rates helps in addition to their “backroom” operations including futures sell-offs, short squeezes, etc.

  17. Agnostic says:

    Go ahead Jay, burst the bond bubble. I double dog dare you. Seriously I’m sick of the jawboning when everyone knows that interest rates can never rise to a normal 6% or past the true inflation rate of 10%. Their only goal is to keep the various bubbles inflated or it’s game over.

  18. Bead says:

    Seems to me there’s been plenty of big expectations the beginning of every year since the GFC. The expectations then drift downward as the year ensues. While it may be the sin of induction, I am expecting disappointment again in 2018. If I am correct the Fed won’t raise four times.

    There is also a midterm election coming. The Fed fears wage gains but voters desire wage gains.

    • Mvrk says:

      “…but voters desire wage gains.”

      Voters will change their tune if/when they get kicked in the teeth by rising consumer price inflation that’s precipitated, in part, from rising wages. Inflation is going to be a new phenomenon for the millennial consumers out there. They’re already freaking out over a few basis points increase in mortgage interest rates. What will they do when mortgage rates and overall price inflation start to climb meaningfully, commit Hara Kiri?

  19. Bobber says:

    The Fed has raised five times and the 30 year mortgage rate has gone up to 4.5%, but still no disruption in the stock, bond, or RE markets. I think this means the Fed will keep ratcheting up rates until there are some problems. Once you see a few marginal business collapse under their debt loads, which is normal, you can have some confidence you are approaching the natural interest rate that should prevail in the market.

    People may think the Fed will simply do QE forever to prop asset markets. They don’t appreciate that asset prices and economic activity (jobs) are not overly dependent. In fact, it’s clear that falling asset prices stimulate new investments as some old investments go bad. Companies aren’t making new capital investments right now because the return is too low relative to the price of assets and wages. If asset prices drop, capital investment will increase dramatically. The Fed is slowly taking us down that path.

  20. mvojy says:

    I just read something where someone said he thought interest rates were kept low to keep the stock market rising which props up the public pension funds. Without a rising stock market the pensions would be even further under-funded and cause tax increases to raise inflows to the funds. A little conspiracy theory but not the worst reason behind ZIRP for the last 8 years.

    • Wolf Richter says:

      But wait… low rates destroy bond market returns. The bond market is far larger than the stock market, and pension funds have normally more money in the bond market than in the stock market.

      This is even worse in Europe, where it is causing major problems with their private pension systems.

      • TXRancher says:

        NY Times article —

        Back when interest rates were high, Pension funds could buy bonds — ideally bonds that would mature around the time they would need the money to pay pensioners — and use the interest on those bonds to fund the payouts. In 1972, more than 70 percent of pension fund investment portfolios consisted of bonds and cash, according to a new analysis from the Pew Charitable Trusts and the Laura and John Arnold Foundation.

        But as interest rates began their long fall, pension funds faced a dilemma. Staying heavily invested in bonds would force governments either to set aside more cash upfront or to cut pension promises. So instead, pension funds radically changed their investment strategies, embracing investments that produce higher returns but also involve more risk. This shift has replaced an explicit cost with a hidden one: that lawmakers will have to divert more tax dollars into pension funds, cut back on benefits or both when stock market crashes cause pension fund asset values to decline.

        The shift began with pension funds’ adoption of portfolios consisting mostly of stocks, with only about a quarter of their investments in bonds. Then, in the last few years, they rapidly expanded their use of “alternative” asset classes like hedge funds, private equity, commodities and real estate. As of 2012, the typical pension fund investment portfolio was about half stocks, a quarter bonds and cash, and a quarter alternative investments.

      • KPL says:

        “low rates destroy bond market returns.”

        This is case enough for the central banksters to have NOT GONE ON AND ON FOR NEARLY A DECADE with their policy of NIRP and a ZIRP.

        So now you have a situation like this…

        low rates … destroys bond holders (buyers of the bonds)
        high rates … destroys borrowers (sellers of the bonds)

        How are they going to solve this riddle of ‘you are damned if you do and you are damned if you don’t’. This is what getting into a box looks like!

        • Wolf Richter says:

          That’s why there should be a market that decides (and solves this riddle), not a handful of people.

        • d says:

          “How are they going to solve this riddle of ‘you are damned if you do and you are damned if you don’t’. This is what getting into a box looks like!”

          Very Easily.

          if rates dont rise SUBSTANTIALLY buyers of bonds will eventually find something else to buy.

  21. CH Tan says:

    I think the rate rises will stop Japan, Russia and China from getting rid of their USD holdings. Thus means a rise of at least 1 percent in the year.

    They just sit back and wait for their USD to earn more money from their holdings. The USD will obviously rise in value but I hope Trump will not accuse China of manipulating its currency. It is a new game in town. Thanks to Powell. Will the Democrats accuse Trump of siding the Russians and the Chinese?

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