Powell Explains Just How Hawkish the Fed is Getting

“But we’re a long way from neutral at this point.”

When asked how much he worried about another “financial crash,” Fed Chairman Jerome Powell told PBS News Hour that the “next set of problems” wouldn’t “look a lot like the last set of problems we had.” It would be “something else, a cyber-attack, some type of global event.” And then he threw in the zinger: “Or maybe it will surprise us and look exactly like the last one.”

It’s those zingers that deviate from the official script that make his Q&A sessions so revealing – I assume, purposefully so. And he pointed out just how hawkish the Fed is getting in its “very gradual” manner.

The interview was wide-ranging and triggered laughter in the audience on several occasions, a feat for Fed Chairs, but I’ll focus on what he said concerning risks and interest rates.

It got started with a question about the risks of raising rates too quickly or too slowly. In the latter case, the risk, he said, is that “the economy overheats, and that can show up in form of too high inflation or financial market imbalances.”

The mantra of “financial market imbalances” started showing up in Janet Yellen’s answers when she was still Chair. It’s the concept that inflated asset prices pose a risk to the financial system when those assets are used as collateral. After spending years trying to inflate those asset prices via its radical monetary policy, the Fed has been trying to tamp down on them. And it’s up there on the worry list: Powell mentioned this risk on an equal basis with “too high inflation.”

So investors shouldn’t expect the Fed to step in when asset prices sink: Bringing asset prices down some is part of the plan. It starts with bonds – raising rates has that effect on them. And it eventually goes from there.

How far will the rate-hike cycle go?

“The really extraordinarily accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore,” he said. “They’re not appropriate anymore. We need interest rates to be very gradually moving back toward normal.”

“And that’s what we’ve been doing now for basically three years, and interest rates have just now in real terms [adjusted for inflation] moved above zero,” he said.

“Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral – not that they’ll be restraining the economy.”

“We may go past neutral,” he added, then threw in another zinger: “But we’re a long way from neutral at this point, probably.”

Currently, the Fed’s target for the federal funds rate is a range between 2% and 2.25%. To Powell, this is “a long way from neutral.” No one knows where exactly “neutral” is, and there isn’t even any agreement if the concept matters. But we’re “a long way from it,” and then the Fed may raise rates “past neutral.” This math takes short-term rates well past 3% and perhaps closer to 4%.

When asked which of the risks worry him more, “going too slowly or going too fast,” he said:

“Almost by definition, I see them as balanced…. We have to take both of those risks very seriously and try to navigate in between them.”

“We’re always going to be looking carefully at incoming data to adjust our policy. If we see things getting stronger and stronger, or inflation moving up, then we might move a little quicker. And if we see the economy weakening or inflation moving down we might move a little more slowly.”

So if the economy weakens, the Fed would still increase rates, only a “little more slowly,” and there was not a word about actually cutting rates if the economy slows. In other words, rate cuts are off the table. What’s on the table is the speed of rate increases.

Which expands on his zinger-rich comments during the press conference after the FOMC meeting.

And when asked what keeps him up at night, he quipped, “basically everything.” Into the laughter, he added, “Nobody wants a central banker who sleeps well, right? What good is that?” Which led to the next and very serious question: Does he worry about another “financial crash?”

“My guess is the next set of problems we have won’t look a lot like the last set of problems we had,” he said. That the Financial Crisis won’t repeat itself for numerous well-established reasons has by now become another mantra, including chez yours truly.

“We don’t detect measures of financial instability as being elevated at this time,” he said. “They’re sort of in the moderate range, in our view, in the view of our staff, and certainly in my view. So it’ll be something else, a cyber-attack, or some type of global event. Those are the kinds of things,” he said.

And then, on second thought, he added: “Or maybe it will surprise us and look exactly like the last one.”

So, OK.

During the last FOMC press conference, Powell had warned that the US is “on an unsustainable fiscal path, there’s no hiding from it.” A few days later, the fiscal year ended, and despite the boom times, this happened… US Gross National Debt Jumps by $1.27 Trillion in Fiscal 2018, Hits $21.5 Trillion  
 

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  73 comments for “Powell Explains Just How Hawkish the Fed is Getting

  1. Dale
    Oct 3, 2018 at 8:43 pm

    “And that’s what we’ve been doing now for basically three years, and interest rates have just now in real terms [adjusted for inflation] moved above zero,” he said.

    Wow. He gets it. Before 2008, the FFR averaged 1.75% above the inflation rate. Right now, it’s about even. So, more work to do. But gradually, so as to gently sweep the instabilities away… if possible.

    But… “We don’t detect measures of financial instability as being elevated at this time,” he said. “They’re sort of in the moderate range, in our view, in the view of our staff, and certainly in my view.”

    That’s pretty much what Bernanke and the rest of the FOMC thought in 2007 and about half of 2008. But they were wrong. And the long period of monetary easiness means that plenty of financial wizards have been cooking up unstable deals.

    • Oct 3, 2018 at 9:07 pm

      At least Powell acknowledges that there might be another surprise Financial Crisis.

      • Mike
        Oct 3, 2018 at 10:01 pm

        It’s always a surprise, the real measure is how fragile they have made they system to surprises (#taleb). Debt used for consumption (or to pay for current expenses) doesn’t make systems more resilient, but no one seems too worried about it.

        • Cynic
          Oct 4, 2018 at 2:50 am

          A late-stage, highly financialised, industrialised, urban economy must of necessity be highly complex, fragile, unstable, and – I’m afraid – doomed in its attempt to squeeze more out of a plundered and degraded Earth than is possible.

          There is no way around this – very – hard fact.

        • RangerOne
          Oct 4, 2018 at 9:19 am

          It’s hard to do an autopsy before the body is dead.

      • Weary Patience
        Oct 3, 2018 at 10:46 pm

        At this point, I am starting to like Powell. Wish they’d not drag out this much needed return to sanity but can empathize somewhat with what is being attempted. Hopefully he has the fortitude to keep his head down and continue the march forward even when it starts to hurt a bit and people kick and scream about the end of easy money. Seeing the stage being set and knowing what’s coming is depressing and at times makes it hard to persevere.

        • Mark
          Oct 4, 2018 at 10:35 am

          “knowing what’s coming is depressing”

          Really?? I’ve been saving and waiting for this for years: the end of cheap credit means asset prices (stocks and real estate) must deflate. If you have been saving during the boom times, there will be incredible bargains during the bust times.

          I still think we will see inversion of the yield curve 6 months to one year prior to the recession, but we’re getting closer. A buyers market for the stock market is maybe 2 years away, buyers market for the housing market is maybe one year after that.

          Patience is a virtue.

      • raxadian
        Oct 4, 2018 at 11:52 am

        Yes he is a tad more honest that the previous guy. But that honesty means little in this crazy market with junk bond Titans like Tesla that keep afloat in mine infested waters somehow.

        The Fed realised that the markets are barely paying atention to it, so they can say things without risking a crash. In fact they want bonds to sink.

        For the FED Musk is basically the public enemy number one.

        Could not happen to a nicer guy.

    • Max Power
      Oct 4, 2018 at 11:54 am

      Well, given where systemic leverage is today compared to historical measures, there is very little chance either the corporate or government debt markets can handle a rise of 1.75% in prevailing interest rates.

      I am not even sure if the corporate debt market can even handle rising interest rates in a general sense. The ever-lowering of interest rates over the past 35 years has been the lynchpin of economic growth over this time period as it allowed debt to rollover at ever increasing amounts without increasing the costs of servicing said debt. A secular bear market in bonds will stop this phenomenon. The market is not ready for this change in trend. There seem to be no other drivers for growth which might substitute for the lost effect from dropping interest rates.

      • Wisdom Seeker
        Oct 4, 2018 at 2:02 pm

        Last time the US recovered from a big debt binge (after WW2), there was a long period of trendless, range-bound interest rates. Best-case scenario would be a repeat of that here. Worst-case, which IMHO is more likely, is the absence of a hard-money limit makes it too tempting to continue print-and-spend fiscal policy and inflation continues to run hot, leading to a rerun of the 1970s with stagflation and the decimation of asset prices, including cash, relative to labor. Which will be good for labor, although the capital class and financial media will piss and moan to no end and make it seem like the universe will end, dogs and cats will marry and all the presidents are terrible regardless of party.

        • Max Power
          Oct 4, 2018 at 5:14 pm

          Flat interest rates a also a problem as they do not allow for an increase in debt levels without increasing the cost of servicing. It’s the fact that debt levels could be increased without increasing servicing costs is what drove economic growth in the past 35 years. That effect is now gone, without a replacement in sight.

          Unless we experience a very unlikely, very long economic growth phase, asset prices will, eventually, crash regardless of what interest rates do. The MEDIAN price/FCF of the S&P500 sits at 35. That is utter insanity. And unlike the CAPE for example, this is not a backwards-looking index. This sort of figure might be reasonable for certain growth stocks but for the companies in the middle of the index to be at this level of valuation pretty much guarantees that sooner or later equities will have to reset to a more reasonable valuation.

          As for bonds – it’s harder to say. I think there are good arguments to be made for bonds to either crash or experience another bull phase.

      • Bart
        Oct 5, 2018 at 4:17 am

        Max,

        A few years ago I read a report that said at one time, $1 in credit produced nearly $1 in GDP and that it had deteriorated so the same $1 in credit only produces .05 in GDP. Back out interest costs and it’s outright scary.

  2. thealicat
    Oct 3, 2018 at 9:42 pm

    Calamities – plague, hurricanes, war –
    Have always been good business plans.

    Our masters are not the idiots ….

  3. vinyl1
    Oct 3, 2018 at 9:42 pm

    I don’t see how asset prices can come down without crashing. The financial system is so leveraged right now, that a small decline in asset prices would set off a chain of selling that would be very difficult to stop.

    And once again, financial market problems would quickly spread into the real economy. This time, it would be leveraged non-financial companies that would be unable to get enough liquidity to stay in business.

    • KPL
      Oct 3, 2018 at 10:18 pm

      “I don’t see how asset prices can come down without crashing. The financial system is so leveraged right now, that a small decline in asset prices would set off a chain of selling that would be very difficult to stop.”

      Yup! And add in the inter-connectedness of the world today, which means it can start anywhere and spread like wild fire.

      The issue is the rate hike is akin to lighting a matchstick to the tinder of debt (accumulated due to low interest rates of the last decade and search for yield).

    • MD
      Oct 4, 2018 at 9:27 am

      Won’t someone please think of the stock buyback programs..?

      How are we going to hit our targets and get our bonuses..?

      We’d have to start looking at things like ‘investing in training people and updating infrastructure in order drive product innovation and development”

      Urgh! How horribly 20th century!

      Oh, the humanity! Please Lord, help us protect the buybacks!

      • vinyl1
        Oct 4, 2018 at 8:10 pm

        The buybacks have eviscerated corporate balance sheets in return for…..basically, nothing. They will still owe the debt they have incurred, even as interest rates rise and their revenue disappears.

        Stock buybacks are supposed to increase earnings per share, but they will end up increasing losses per share.

    • LessonIsNeverTry
      Oct 4, 2018 at 5:29 pm

      I think the equity market is overvalued, but it seems more resilient than you’ve described. It is easy to forget that we had a 10% decline in 9 trading days in February and look where we are now.

  4. Harkness
    Oct 3, 2018 at 9:51 pm

    Hmmm, its my completely amateur opinion, but I’d say its unlikely that the exact trigger for the next crash will look exactly like the last crash. But, then again not much has been done to heal the system since the last crash, so when it starts to snowball along, it might look a lot like the last crash. Except now the world is even more over-leveraged than before after the whole ZIRP/NIRP bit of free money.

    • Buckaroo Banzai
      Oct 4, 2018 at 11:12 am

      Jeff Snider at Alhambra has made a compelling case for the idea that the underlying problems that caused the 2008 crisis have still not been addressed, and the “extraordinary measures” that global central banks have taken over the last decade have merely papered over the problems, which continue to fester. This implies that when the central bankers run out of paper–and they will–we’ll just get 2008 all over again, just much bigger this time.

      While Powell is certainly a refreshing change of pace as far as his personal style goes, he is still running the same old plays out of the same old playbook that got us into this mess back in 2008. So, yeah. Expect for the worst.

  5. Crysangle
    Oct 3, 2018 at 9:56 pm

    Well I am just glad that they balance after neutral and guide the difference in an accommodatively restraining way by defining too slowly if they move too fast for an appropriately gradual normalisation.

  6. Old dog
    Oct 3, 2018 at 10:13 pm

    “So investors shouldn’t expect the Fed to step in when asset prices sink: Bringing asset prices down some is part of the plan. It starts with bonds – raising rates has that effect on them. And it eventually goes from there.”

    If I understand this correctly, a rising FFR puts downward pressure on assets and inflation. However, the side effect is that it causes the dollar to surge because there’s nowhere else for the money to go. At least until prices stabilize. Am I missing something?

    • Mean Chicken
      Oct 4, 2018 at 9:48 am

      “investors shouldn’t expect the Fed to step in when asset prices sink”

      Except it’s the FED’s modus operandi, to create opportunity for special interest groups, some call it inventing the future but IMO the intent is purely for criminal interests.

  7. TrojanMan
    Oct 3, 2018 at 10:29 pm

    I almost wish they would just get on with it and hike by 0.5%. We really want to buy something in the Bay Area (tired of renting) but it’s tough to pony up $1 – $1.2 million when value will slowly bleed over this hike cycle. On the one hand an $800K mortgage + taxes + insurance is only $1K more than our rent now and we continue to blow rent money that could be going to equity, but on the other hand I do not want to buy and go underwater in the near future. If there is another crash though, say more than 20% in housing nationally, I believe the Fed will drop rates again and possibly turn on the spigots.

    • Bobber
      Oct 3, 2018 at 11:20 pm

      Why would the Fed reduce interest rates after a 20% housing drop? Hardly anyone would be impacted, given prices have risen 50% or more on the West Coast over the last five years. People would see some of their housing gains evaporate, but that’s about it. I wouldn’t expect a large amount of mortgage defaults, although a small percentage of homeowners and speculators that were late to the game will certainly take a much deserved beating.

    • Mark
      Oct 4, 2018 at 10:49 am

      I’m in the same boat up in Seattle. Renting, pre-approved for a mortgage right now, sitting on $300k in savings and looking at homes in the $800k range.

      I just don’t think this is the right time. Homes are about as expensive as they can be based on incomes and rising interest rates. As for the “getting equity”, if you’re getting a 30 year mortgage, about 70% of your payment is going to interest, not equity. So for that $4,300 monthly payment, only $1,300 is going toward equity every month. For that, you’re exposing yourself to tremendous risk of a downside correction in prices.

      We figured we could buy, but we’d need to stay 10 years and breaking even after that time would be a good outcome. It could be a good decision for quality of life, but not necessarily a great financial decision.

      • Nicko
        Oct 4, 2018 at 1:49 pm

        Statistically, most home owners only keep their home for 5 years or less. Buyer beware.

      • LessonIsNeverTry
        Oct 4, 2018 at 5:35 pm

        I completely agree. Your argument, coupled with the huge market mood shift since May in the area, makes this an excellent time to wait. I still believe a 2008-like collapse in home prices is unlikely but there is no harm in being patient at this point.

    • GSH
      Oct 4, 2018 at 12:05 pm

      The problem with that train of thought is that when housing assets do collapse by 30% you are likely going to be out of work and in no position to acquire the reduced price homes.

      • Mark
        Oct 5, 2018 at 12:28 am

        We save/have saved aggressively and both have relatively recession-proof professions in healthcare.

        I could envision an income of 30% in some post-recession, Medicare for all, Bernie Sanders like world, but the job will always be there, and we’re frugal enough that we’d still be saving. Demand is only increasing as Boomers continue to age and demand services, while there’s a shortage of labor in most healthcare fields that’s only going to get worse. Not too worried.

  8. Ted Freeman
    Oct 3, 2018 at 10:37 pm

    Should we have a committee deciding the Fed funds rate, or should it just be a permanent fixed rate (6 or 7%)? The damage is done now, but imagine we had a fixed rate instead of Greenspan or The Bernank blowing asset bubbles at the Fed. A sufficiently high risk free rate would serve as a hurdle against dubious investment and speculation, keeping bubbles under control.

    • Tony T
      Oct 4, 2018 at 1:35 am

      Imagine for a moment, if we just abolished the Fed. Let the lenders and borrowers determine the appropriate rate for themselves. True capitalism, true market price discovery. One can only dream. I’m sure the borrowers and lenders would do a much better job than any Central Bank.

      • Ted Freeman
        Oct 4, 2018 at 9:27 am

        Or only lend at the discount window to provide liquidity, and eliminate the concept of the Fed funds rate altogether. Why should we care about the rate at which banks lend overnight funds to each other?

      • Mike
        Oct 4, 2018 at 10:17 am

        …or have the Fed return to its original mission. If inter-bank lending freezes up, the Fed becomes lender of last resort.
        The mission creep from that to the monetary Politburo is quite amazing.
        Bureaucracies just grow and grow until they swallow up everything around them.

    • Ambrose Bierce
      Oct 4, 2018 at 12:00 pm

      Imagine they just went to the Taylor Rule? I think that if lending rates go much higher banks will discount their lending rates in order to keep business moving. We live in an economic model where sellers must keep step with buyers, and consumer spending outlays reverberate through the system. Inflation never gets out of hand. We might run out of things (fungible replacement) but they will never price their products out of reach.

  9. bungee
    Oct 4, 2018 at 1:22 am

    The usual ‘doomer’ viewpoint on the rate hikes would be to point out the national debt. It seems a valid one. A higher FFR means we’re servicing the debt at higher rates, no? And if stocks take a hit, housing takes a hit, jobs take a hit… tax revenues down and Powell has no intention of turning around? Is this too pedestrian an understanding of how this is all going to play out? Because i’m planning for there to be a lot of bag holders and trying to not be one of them. I just don’t see how any substantial amount of people will be allowed to ‘cash-out’ of all this boom without major disruptions.
    Also, the rate might dip back below inflation and therefore become a negative real rate again without Powell having to look like he backtracked. Inflation can possibly overtake the hikes and we can see both at the same time in other words.

    • LessonIsNeverTry
      Oct 4, 2018 at 5:39 pm

      If we are talking about pedestrian views from space, I think the obvious counter to the valid concern about the national debt is:

      In the US we will be the cleanest dirty shirt, when you contrast the combination of out military, resources, workforce, and financial clout against other nations/blocs. This isn’t just Debt/GDP but (Combined Power)/GDP. Depending on what number you believe, China may or may not be our only real competitor.

  10. Father B
    Oct 4, 2018 at 1:28 am

    It was suggested to me that the Fed rate needs to rise further so that it can be lowered again should there be another melt down. What other knobs can they turn ?

  11. Cynic
    Oct 4, 2018 at 2:53 am

    If one keeps in mind that one is in the middle of a gigantic crash -that of a whole civilisation, the one established since 1500, accelerated since 1800 – it is easier to both soldier on relatively cheerfully, and to bear the inevitable ups and down in one’s fortunes.

  12. kk
    Oct 4, 2018 at 2:57 am

    Maybe during the next crisis they will give the free money to the people instead of the bankers – I’d be willing to spend public money in the public interest on a new car perhaps….

  13. Rob
    Oct 4, 2018 at 4:12 am

    Biggest imbalance is wages as a percent of GDP vs corp profits and CA deficit as a percent of GDP. That sectoral rebalancing is a very significant part of the Fourth Turning. Almost certainly will happen via a fiscally stimulative, reflationary regime. As such write down his 4% number…

  14. Keeper Hill
    Oct 4, 2018 at 8:04 am

    Jubilee needed. And it will come

    • L Lavery
      Oct 4, 2018 at 8:22 am

      How will it work for pension companies?

    • Cynic
      Oct 4, 2018 at 9:13 am

      Debt is someone else’s asset – it can’t work.

      They will and must print, and destroy currencies.

    • MD
      Oct 4, 2018 at 9:31 am

      Not a snowball’s chance in hell – far too much power and dependence on the finance sector now for that particular mechanism to be implemented – these are very different times from those in which the last jubilee took place.

      Society will go to hell in a handbasket before the financiers lose their ongoing revenue streams. They’ll make sure of that.

      So forget any notion of your car loan and mortgage being written off.

      Ain’t gonna happen under any circumstance.

    • Oct 4, 2018 at 9:47 am

      It’s called “bankruptcy” in the US. It’s a legally defined process supervised by a judge. It’s working in the US.

      These jubilee-believers have to understand one thing: every debt by definition is someone else’s asset. If these debts suddenly disappear, the assets (including what’s in every pension fund, in your retirement nest egg, in your bank account, etc.) disappears too. Poof, gone. No more paychecks, no more groceries, no more anything… In a credit-based economy, you cannot wipe out one side of the two-sided equation without shutting down the economy.

      But bankruptcy takes care of debts that cannot be paid on a case-by-case basis and wipes out creditors and shareholders on a case-by-case basis in a defined process – rather than wiping out the entire economy.

      • a reader
        Oct 4, 2018 at 10:24 am

        Wolf, you have written a response like this one before. But what if we talk in more specifics?

        Take a case of a credit card holder. He has a balance owing he can’t pay off, stops spending, and the CC company keeps compounding it at 18%. Do they show the balance owing as an asset on their books?

        Now, let’s say after 2 years of this the balance hits the max limit, with 20% of it being the originally borrowed money (CC company funds), and the rest being the compounded interest.

        The card holder calls the CC company and negotiates to pay off the card debt at 1/2 of the balance owed (that, or he boards the plane for Cuba and is never heard from again).

        Now, what exactly is the asset that was “lost” here in the form of that 50% written off debt? The CC company (the card-issuing bank) got more than its share in the form of the 30% interest on their 20% cash.

        I’d say what was lost was just some of their greed.

        • Ed
          Oct 4, 2018 at 11:59 am

          Some nonprofits have been trying to provide micro loans to get people out of this high interest debt trap. The Catholic Church does this is several cities here in Texas, though I believe it’s very small scale still.

          The credit card companies used to call the people who paid off their balances every month “dead beats”. They *like* the customers you describe.

          (I suppose they like them until a financial crisis, then they complain about them.)

        • Ed
          Oct 4, 2018 at 12:02 pm

          I should say the donations are used as a guarantee to banks who sign up to provide the low interest loans. The idea is a small seed amount of money can support a lot of loans for a lot of people.

          The banks are happy because it’s good PR and guaranteed.

        • Setarcos
          Oct 4, 2018 at 12:46 pm

          But there was no greed involved in using the card to pay for stuff, running up the balance and agreeing to repay the debt … and then not paying? Dude, there are so many arguments you could make effectively against credit card companies, so give it another try. However, must say that I deal with those same card companies and happen to find their products very convenient and beneficial.

        • Oct 4, 2018 at 12:59 pm

          a reader,

          You describe “debt restructuring.” This happens all the time, in two places, 1. outside of bankruptcy court; and 2. in bankruptcy court.

          Debt restructuring requires that both parties agree. The banks has the tools to squeeze the credit card holder (wage garnishments, etc.), but might find it easier to work out a deal. If there is no agreement with the two, then the bank can use its collection tool, and the CC holder can seek protection in bankruptcy court.

          This is a very common way of dealing with debts, particularly in the corporate world.

          Neiman Marcus is currently trying to “restructure” its debts with its creditors without filing for bankruptcy. It is said to already be in default. If it fails to persuade its creditors to go along, the creditors will try to execute on their collateral, and NM will seek protection from them in bankruptcy court, where this will get worked out one way or the other, most likely with creditors getting the company, and with shareholders getting wiped out.

        • safe as milk
          Oct 5, 2018 at 2:50 am

          the cc companies won’t get 50%. more like 10%, if they are lucky. when the consumer stops paying, the charge off happens in about 6 months.

          also, how much are they losing to fraud? both my wife and i have had accounts compromised in the last few months. it appears to have originated from online purchases in both cases. the bank basically yawned when we reported it. has this reached epidemic proportions?

      • Ambrose Bierce
        Oct 4, 2018 at 10:46 am

        By simple math a trillion left the US economy, to offshore tax shelters [sic] and through “fraud”. The reflated cash provided by the Fed was then doubly inflationary causing stock prices to leverage asset prices much higher than the underlying currency, (but not really). Now they want to deflate assets while dollar inflation is running hot, mostly due to wages. Amazon now has 2X the Fed minimum wage. You know something is happening but you don’t know what it is. Do you Mr. Powell?

      • Keeper Hill
        Oct 5, 2018 at 5:09 pm

        I understand it perfectly well. Debt that cannot be paid will not be paid. People who lent to a broke government deserve to lose also.

    • Setarcos
      Oct 4, 2018 at 9:58 am

      Jubilee …is that what they called it in Greece a couple years ago when people had their savings confiscated? There is always a price to be paid. Sometimes the price is paid with something much more valuable than coin.

      Reminds me of a good friend early in his marriage who agreed to his in-laws funding the remodel of his domicile. I asked him why? He said, why not, it makes everybody happy. His happiness with his in-laws was short lived. The seeds of his inevitable divorce were being planted and he didn’t have a clue.

    • Max Power
      Oct 4, 2018 at 9:59 pm

      I doubt we’ll see a debt jubilee.

      That said, Steve Keen has an interesting debt jubilee concept. Everyone get some newly minted money but if you have debt (like say student loans) you have to use it to pay down debt first. This way those who were prudent about not getting into debt are not discriminated against.

  15. Mike R
    Oct 4, 2018 at 8:14 am

    First of all, the government now controls the stock market. Except for some very scary black swan event that would cause massive selling across all investor classes, they will “manage” the market.

    And the Fed is being very careful with the bond market. Very slow increases.

    Housing will adjust on its own and already is. The big factor in a major housing decline would be an big spike in unemployment. That is a real possibility but probably not while the government is goosing the economy with 1.2 trillion deficits.

    The deficit spending is what’s holding up the economy as we tighten monetary policy. And the tightening will stop in another couple of rate hikes. 3.5% on the 10 year note is about all that the economy can handle, IMHO. I’m laddering up with 10 years as they will be a good investment in the next crisis.

    Once the tightening is done, the government will be asked to move towards more restrictive fiscal policy. Whether they will or not remains to be seen.

  16. Hugs
    Oct 4, 2018 at 8:26 am

    “…I don’t see how asset prices can come down without crashing….”

    Increase federal government spending. Increase tariffs. Decrease immigration (ie increase wages at the bottom). Increase interest rates.

    Asset prices stay the same or increase slightly. Cash flows increase to levels that can pay off leverage. New leverage discouraged by high interest rates. Banks encouraged to loan reserves to favored investments.

  17. jb
    Oct 4, 2018 at 9:44 am

    3 month brokered gov guaranteed cd’s yielding 2 %, rolled every 3 months. I’m diggin it.

    • Mr. Knoss
      Oct 4, 2018 at 11:56 am

      I don’t like giving advice, but you can get 4 week T-Bills at 2% that roll every 4 weeks.

  18. Hopeful
    Oct 4, 2018 at 10:06 am

    Wow! A Fed boss who knows he may make mistakes, admits it and offers his analysis (not argument) with a sense of humility altogether absent during the Greenspan/Bernanke era. Talk about sea change! He will likely be tested when the numbers start to suggest some air is coming out of the balloon(s).

    Good luck to us all. I am hopeful but not yet optimistic.

  19. timbers
    Oct 4, 2018 at 10:39 am

    Right now, you can open a 12 month CD at 2.5%. That’s “bad” vs QE asset appreciation but up sharply from recent years. It’s where my savings is going until I see asset prices come back down from Mars.

    Maybe once we have a noticable decline in assets such that enough people take note, it causes them to return to normal cautionary levels that existed pre QE, it could open a substantial wave of funds flowing into safe savings instead of inflated assets.

    That could trigger a financial asset collapse or the closest to it.

    My concern is the Fed will interpret any large asset correction to be a “crisis” in and of itself and return to asset inflationary policies.

    • Wisdom Seeker
      Oct 4, 2018 at 2:13 pm

      Rates are rising. Just got a 12-month offer at 3% last week. Not sure it’s worth it since rates will be even higher in a few months!

      This is the environment where a ladder beats a mutual fund or ETF.

  20. Gorbachev
    Oct 4, 2018 at 10:49 am

    Would like to know or if there is a site that helps or forecasts

    at what level higher interest rate begin to bite various co.

    For instance -ford will get bit because of their high debt but

    their pension fund may get a kick up. Is the positive enough offset

    the negative.

  21. Ambrose Bierce
    Oct 4, 2018 at 10:54 am

    The slow grind in the wheels of justice says no to debt jubilee or one off write downs. If they can rejoin the Trump tax fraud case, they can start digging into 2008. Nominee hearings are metaphor, “the investigation will not end at the hearings…” A debt collapse would be permanent.

  22. Paulo
    Oct 4, 2018 at 1:25 pm

    Hmm, Market down +300 pts right now. (DOW)

    800-900 down might get an obvious reaction, or 4-5 days of 300+ drop. I just hope the Fed has the jam to keep restoring sanity to this borrowing binge people think is normal. My solution, stay the course and wait for the inevitable deals. Sometimes it’s better being the ant…like always.

    Maybe someday folks might realize life is not a beer commercial. Call me silly, but our house has 7 years of heat stored in woodsheds, freezers full of food, and cash in the bank, etc. Life will be just fine. Oh yeah, we also pay/paid our full share of taxes and are glad to have contributed to our country, unlike the people who are going to crash this baby into the brick wall. And the little guy will get in the ear, like always.

    Good luck as this unfolds.

    https://www.dltk-teach.com/fables/grasshopper/mstory.htm

    • Nick
      Oct 4, 2018 at 1:32 pm

      Of course life is fine for you…….if you’re 50+ years old you’ve had it easy…..and anyone 60+ has had it easier. I feel sorry for 25-35 year olds growing up right now having families. This country has been looted by previous generations. And those previous generations love to skirt the blame but look at the age of your average politician. I’m 39 years old, NEVER voted for Bush, NEVER voted for Obama, and now that I voted for Trump he’s been a huge disappointment. The ONLY hope for this country was a Ron Paul type who, oh my god, actually talked about auditing and ending the FED. Until ANYONE gets into office who is serious about that America will continue to circle the drain. I believe in my lifetime there will be a major war with China/Russia vs. USA/Israel and Russia will come out on top as the last great Christian superpower. It’s disgusting how we live as Americans and how the other 90% of the world lives in comparison just because we happened to be the first to produce and use nukes and force people on our path of dollar hegemony and petrodollar dominance. There should have been a 2nd revolution in 1913. Americans are some of the most dumbed down people on Earth……..and our obsession with multiculturalism is killing our society and morale in this country.

  23. Ambrose Bierce
    Oct 4, 2018 at 2:01 pm

    There are a couple myths, one that geopolitical events don’t shape the market, which may have their day at last. The Trump rally is indeed “real”, and the consequent selloff will follow course. While I am inclined to think markets are made of money, I also consider that stocks function more like commodities (ETF and indexing) and are subject to the one buyer one seller paradigm. I suggest the president, as businessman would try to sell out this rally if he thought he could make a profit. The market as sacrosanct institution may be ending. There is no Powell put.

  24. Wisdom Seeker
    Oct 4, 2018 at 2:27 pm

    One concern re: Powell’s remark “We don’t detect measures of financial instability as being elevated at this time”

    The problem is that the “detectors” they are using aren’t looking in the right places. They’re looking for the triggers of the last crisis, but the market knows that and has evolved to put the risk where it isn’t being seen. So they’re watching mortgages and TBTF banks but missing the real dangers.

    Top of the list are the covenant-lite junk and leveraged loans in the corporate sector. When the corporate share buybacks they funded end that pulls the bid from the stock market. The implicit combined losses in both together will, when realized, destroy pension funds and further break corporate and state/city finances.

    Meanwhile, in the household sector, when the recession hits and employment falls, borrowers overextended on auto loans and student loans will have to curtail spending. Mortgage borrowers who have to move (due to loss of employment) will lose their life savings when forced to sell into the down market as real estate values correct. Their bondholders will be somewhat protected by combination of collateral value and the federal backstop through Fannie and Freddie, but the attractiveness of those bonds will take a hit, again impacting pension assets.

    Time frame for all of the above to play out: 2020 into 2022, depending on how the political process goes. If the Dems get Congress in the upcoming elections, they’ll push to make it happen sooner. The Republicans will be conflicted, with the RINOs wanting Trump out and working with the Dems to get the recession earlier so Trump takes the fall. If Trump decides he wants another term, he will use all his tools to push the reckoning off until after the 2020 election.

    The next question is how much the government can print to paper over the crisis, without triggering a loss of faith in the currency. CPI much over 2% and/or negative real rates would both be major factors.

  25. Laughing Eagle
    Oct 4, 2018 at 3:17 pm

    Today’s WSJ had a column on “China to Raise Billions in Dollar Debt”. China plans to sell $3 billion in US dollar bonds in 5, 10, and 30 year bonds. In 2017, China issued $2 billion in 5 and 10 year bonds at a higher rate than US Treasuries. So is China forcing the Fed to hike rates? This could get very interesting.
    Also a colum on corporate debt in US growing from $2.5 trillion to $6.3 trillion. Seems these financial wizards do not realize these debts and stock buy- backs of $700 billion since the Trump tax cut show future growth looks dim. And the same wizards wonder why productivity is down.
    But lucky for us, Wolf is exposing the propaganda.

  26. vinyl1
    Oct 4, 2018 at 8:04 pm

    “We don’t detect measures of financial instability as being elevated at this time,” he said. “They’re sort of in the moderate range, in our view, in the view of our staff, and certainly in my view.”

    Really? Does he actually have any clue what is going on in the markets?

    The giant piles of leverage are out there for all to see. The companies are leveraged, the funds are leveraged, the accounts are leveraged. Can you buy on margin a leveraged CEF of leveraged companies? Sure, no problem…..

  27. KFritz
    Oct 4, 2018 at 9:41 pm

    And now for, “What could go wrong?!”

    At the moment Trump’s attention is on Kavanaugh, an FBI investigation, an unwanted attorney general who won’t take the hint and disappear, North Korea, Iran, etc. The economy is, seemingly, humming along. Trump has shown his contempt for corporations and their CEOs by starting a trade war with China. BUT, if the economy gets bumpy and the CEOs and the FIRE sector begin to howl about the Fed, Trump will likely be more conciliatory, and make Powell’s life miserable. He’ll try to replace him with someone who will make the situation even worse. IMO.

  28. sierra7
    Oct 4, 2018 at 11:07 pm

    After reading the comments I’m off to the nearest hardware buying shovels!!!!

Comments are closed.