10-Year Yield Jumped to 1.66% as Fed’s Waller Got Hawkish, Shredded Inflation Indexes that Strip out Food, Energy & Outliers, Put Faster Taper & Sooner Rate Hikes on Table

“Greatly concerned” that inflation “will not prove temporary.”

By Wolf Richter for WOLF STREET.

The 10-year Treasury yield jumped to 1.66% at the moment, the highest since mid-May, after Christopher Waller – President Trump’s December appointment to the Federal Reserve Board of Governors – said in a speech today, “If monthly prints of inflation continue to run high through the remainder of this year, a more aggressive policy response than just tapering may well be warranted in 2022.”

Waller supports tapering the Fed’s asset purchases “following our meeting in November,” but this whole business about “a more aggressive policy response than just tapering” in 2022 – he put on the table are a faster pace of tapering and rate hikes that would come earlier in 2022 – jostled some nerves in bond land.

QE was specifically designed to push down long-term yields, such as the benchmark 10-year Treasury yield and mortgage rates; and it succeeded superbly. Tapering QE is going to remove a massive buying force – the relentless bid – from the market. And the market is toying with those prospects.

At the short end of the Treasury spectrum – from the one-month to one-year yields – not much has changed, all of it below 0.11% today, effectively controlled by the Fed’s grip on that end of the market through its policy rates and trading activities, including the target range for the federal funds rate of 0% to 0.25%, its repo rate of 0.25%, its reverse repo rate of 0.05% – implemented in April to prevent short-term yields from dipping below 0% – and its Interest On Excess Reserves (IOER) of 0.15%.

But the 2-year yield has doubled over the past month to 0.41% today, and for the past week has been the highest since March 2020.

Mr. Waller, the new man at the Fed, carefully repeated the official line of his boss that inflation may be temporary and might settle down at 2% on its own somehow and then went about to shred this line.

He is “greatly concerned about the upside risk that elevated inflation will not prove temporary,” he said. And he said:

“Bottlenecks have been worse and are lasting longer than I and most forecasters expected, and an important question that no one knows the answer to is how long these supply problems will persist.

“Through our business contacts, we continue to hear stories about bottlenecks at almost every stage of production and distribution—for example, plants that shut down because of a shortage of one or more crucial inputs; a poor cotton crop in the United States due to weather, which is driving up prices; and clogged ports and trucker shortages.

“Meanwhile, wage gains have been strong. That apparently has not made its way into prices yet, but how long before it becomes a factor driving inflation?

“Firms are reporting that they have more pricing power now than they have had in many years, as consumers seem to be accepting higher prices.

“The simple answer is that I believe the next few months will be crucial to understanding whether elevated rates of inflation last and if that will trigger a lasting effect on the U.S. economy.”

While at the shredder, he also shredded some of the often-cited inflation measures that make inflation appear lower by stripping out food, energy, and the outliers – the price spikes in used vehicles or gasoline or new vehicles or whatever.

He specifically pointed at “core” inflation measures that strip out food and energy; and at the “trimmed mean CPI” by the Cleveland Fed and the “trimmed mean PCE” index by the Dallas Fed that strip out any outliers.

“A way of manipulating the data,” he called these efforts.

The problem with removing the outliers is that the price spikes may be rotating from product to product – the game of Whac-A-Mole, as I’ve been calling it since June. Each time an index removes a different “outlier,” when in fact, it’s one outlier after another, rotating through the basket of goods and services, and in fact, they’re not outliers at all, but signposts of high inflation.

By removing food and energy and the outliers, “we may be led to ‘falsely’ dismiss certain price movements and risk being misled as to the true inflation rate,” he said. Hawkish, hawkish, hawkish

“We must keep our eyes open to inflationary pressures, wherever they come from, with consistency and rigor and stand ready to adjust policy if we conclude that such a change is warranted,” he said. Hawkish, hawkish, hawkish.

“If my upside risk for inflation comes to pass, with inflation considerably above 2 percent well into 2022, then I will favor liftoff [of policy interest rates] sooner than I now anticipate,” he said.

Speeding up the pace of tapering “would provide policy space in 2022 to act sooner than now anticipated to begin raising the target range for the federal funds rate,” he said. Hawkish, hawkish, hawkish.

“A major consideration will be my judgment about whether inflation expectations are at risk of becoming ‘unanchored’ – rising substantially and persistently above 2 percent,” he said.

They have of course, as he noted, already shot way above 2%. The New York Fed’s own index of consumers’ median inflation expectations for one year from now jumped to 5.3% in September (red line), and inflation expectations for three years from now jumped to 4.2% (green line), the embodiment of “unanchored”:

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  136 comments for “10-Year Yield Jumped to 1.66% as Fed’s Waller Got Hawkish, Shredded Inflation Indexes that Strip out Food, Energy & Outliers, Put Faster Taper & Sooner Rate Hikes on Table

  1. Old School says:

    Remember when Powell and Yellen we’re saying we would rather err on the side of doing to much than too little. The chickens coming home to roost.

  2. MCH says:

    Quick, somebody find out what Waller traded on during his term at
    the Fed so far. Come on, let’s go with the disclosures already. We can’t have a member talking like this.

    • JeffD says:

      Correct. Immediately investigate all hawks and force them to step down.

    • MF says:

      Agree MCH. The only sure thing these days is insiders win. If that doesn’t prove to you that markets are 100% managed (i.e. “free market” is a myth), then nothing will.

      Now that all the free money has been successfully distributed to the likes of Blackrock, wealthy insiders have every incentive to push long term rates higher, which pushes the last remaining small buyers out of the housing market. What’s not to love?

    • Mors Tyrannis says:

      Right the whole system is rigged. Even in your local community. Do you really believe those contract bids are sealed bids? Why do you think the same contractors win bid after bid? Its all a rigged game.

  3. cas127 says:

    Good thing the US doesn’t have a centrally (mis)managed economy.

    • Winston says:

      What are you talking about? Central planning by massive, corrupted bureaucracies is always your bet bet.

  4. DawnsEarlyLight says:

    Wow, what a relief! Pennies do matter! 🤦‍♂️

    The theft WILL continue!

  5. Joe in LA says:

    Rising rates will trigger a recession and market collapse and then — lower yields. We can’t break away from the lower bound with all this debt.

    • Depth Charge says:

      I don’t know who this “we” is, but speak for yourself. Society is collapsing from these asset price bubbles. I thought you were from LA? Haven’t noticed the hundreds of thousands of homeless, huh?

      • Anthony A. says:

        They are really not homeless….most have tents…and I hear some are growing their own food. It’s the new way to live, you know, minimalist stuff.

      • Joe in LA says:

        America is governed by a criminal oligarchy that doesn’t care about me, you, or the thousands of people sleeping on the streets in LA.

      • phleep says:

        I think asset price bubbles were a factor. But Americans were mismanaging their personal finances for decades (e.g. horrid savings rate and credit over-use pre-2008). This exposed the worst-performing of them to falling big levels downward when shocks happened. Discipline should have been reinstated with tightening in the 2010s, but again the crowd made the wrong choice, as being electable became a matter of promising candy. When COVID happened, the central authorities had no alternative but to print, to pump more hormones into the already sick and unhealed patient. Short term it keep food and shelter in place but fed this inflation, with an up-draft added by the burst of demand this year. Trump and GOP were running up debt-candy and promoting printing like everyone else, with inflation talk rising back then (dalayed by COVID)(and now they bring a shock of refusing to authorize a corresponding debt limit). Behind every bad decision in this democracy is the masses’ will and desires. Around here I hear the reductive refrain, “blame the Fed” for everything like a broken record. To most Americans I say look in the mirror. Benefits with no taxation (and consumer self-mismanagement) goes back to LBJ at least.

        • Paulo says:

          Good comment Pheelp. Just want to add it applies to other countries as well.

          Debt, personal and Govt debt, does matter. Directed and limited debt can be a necessary tool if used wisely, but it can quickly turn into a gun at our heads.

          My prediction is a more rapid rise of interest rates. Why? Because wages are now going up. Because workers are getting demanding. They’ll force a crisis then take the boots to workers wage expectations as soon as they can. Remember, corporations own the Govt and their pet politicians…always have and always will.

        • Jake W says:

          disagree, fed enabled the masses’ will. without the fed there to print the money, taxes would have had to go up enough that people would have reconsidered.

        • Petunia says:

          phleep,

          Stop blaming the victims.

          The govt told us to go to get educated, it was a great investment in your future. The debt is now oppressive.

          The govt told us to work hard, they would look out for us. Then they off shored the jobs through NAFTA and WTO.

          The govt told us buying a home was the American Dream. Then the govt allowed Wall St. to put us on the street.

          The govt told us the two party system was the best in the world. Now they can’t govern.

          While the American people were doing the right things, they were undermined by globalism, climatism, liberalism, conservatism, and useless wars.

        • Augustus Frost says:

          Seriously, listening to “advice” from the government?

          Whether those who acted as the above post claims is matter for debate. In my limited circle during life, I have yet to meet even one person whose screwups during noticeably contribute to their misfortune.

        • Swamp Creature says:

          We need Ike back now more than ever.

    • Old School says:

      Fed is getting to a decisive point. They are going to take the punch bowl away or not. Not much more complicated than that.

      • Billybob says:

        Can we remove the turd (Powell) from the punch bowl too please?

      • Swamp Creature says:

        Get rid of Yellen too while you’re at it.

        • Old School says:

          I fear Yellen more than Powell. She’s an academic that doesn’t understand the real world imho.

      • Stylites2 says:

        If they take the punch bowl away and taper to zero, thus removing the “relentless bid” in the market, can we estimate – or has the Fed ever done analysis on – how that would likely impact rates? I mean what does $120 billion mean in the context of total trading in UST? Is it 5% of trading? 10%? Anybody know that answer?

  6. Depth Charge says:

    More empty rhetoric from the FED. These guys are so full of hot air it’s pathetic. Meanwhile, Weimar Boy Powell continues full speed ahead with QE.

    • Old School says:

      Yep. Central banks are all in it together. Doesn’t matter if it’s dollar, euro or yen, gold is up 9% annually last 15 years against all three.

      • Stoneweapon says:

        Exactly, it’s one big cartel and the renminbi was designed to regulate the inflation of production/human labor and the futures to regulate the inflation of commodities. So basically the currency central banking cartel regulates the trade of what is real and tangible until civilization has nothing left to offer the hollowed out middle class but a UBI digital technocracy. If we don’t wake up and learn to trade outside their corrupt system, we will eventually be chained to it though biometric ID’s, QR codes and cashless digital regulated transactions. Banknotes will be demonetized, silver and gold illegal and so on.

  7. Pacifica says:

    Waller seems to be part of the stupidity of our leaders, if you’re going to lie, it might as well be a big one…the governments new motto should be Go Big or go home.

    • andy says:

      IF they are going to lie?

    • Old School says:

      Don’t think anyone’s opinion matters at the Fed except Powell and Brainard. It’s really a two person decision making body and everybody else goes along. Must be a power trip to run the world.

      • historicus says:

        and Larry Fink’s

        “Must be a power trip to run the world.”
        unelected as they are, answering to no one apparently

        Shouldnt the Senate Banking Committee call out the Fed and say..
        “Hey, what about stable prices and moderate long rates?”

        • Swamp Creature says:

          Yep, Larry Fink, the CEO of Blackrock, is in bed with the CCP and is obviously influencing things at the Fed indirectly, given the large size of their portfolio. When he says jump, the only question they ask is “How high” . He was on CNBC the other day and when pressed about his large percentage of investments in China he would not answer. Finally, after being asked the same question a dozen time he finally admitted that his first allegence is to his shareholders.

      • Wolf Richter says:

        Old School,

        Waller is on the Fed Board of Governors, same as Powell and Brainard. All three, along with the other four (if fully appointed), are government employees, appointed by the Prez and confirmed by the Senate, unlike the presidents of the 12 regional Federal Reserve Banks, who are private sector employees. The Fed Board of Governors is at the core of the Fed.

        • COWG says:

          Waller is the poster child of long game politics…

          No. 2 at the St Louis Fed behind Bullard… in charge of research and theory… A teacher before that at several academic posts including Ky…

          Kentucky is also under the umbrella of the St. Louis Fed…

          Kentucky is also home of one Mitch McConnell…

          Trump and McConnell slammed through Waller to fill a term that would have expired after Trump left office…

          Republicans want control back in 2022… what better way than to sell the narrative that their appointees to the Fed saved the economy those slimy Democrats destroyed by raising interest rates…

          Biden has to get rid of Powell while he has the chance to change the narrative… Or game over for the Dems… It IS the economy, Stupid…

          Long game poiltics…

        • Wolf Richter says:

          Don’t forget: there is currently one open slot for Biden to fill. Then there are the re-appointments or non-re-appointments coming up. So Biden will get to put his stamp on the Board. Trying to get someone through Senate confirmation may be harder.

        • Swamp Creature says:

          Don’t expect anyone decent from Biden to fill the vacant Fed reserve post, given his sorry record of appointments to date, His recent appointment for Comptroller of the currency is a communist who got her degree at the University of Moscow.

        • COWG says:

          Forgot that one… you’re right, Biden can’t get anyone through the Senate right now…

          And trying to do anything vis a vis the Fed is walking a tightrope on his spending agenda…

          What’s here is here so let’s not let a good crisis go to waste….

  8. James says:

    The same people that got us into this mess are now claiming to get us out of this mess.

    Andrew Jackson’s statement will haunt this country until it, like Rome, demises.

    • Dan Romig says:

      James,

      You gotta hand it to President Jackson’s use of rhetoric:

      “You are a den of thieves’ vipers, and I intend to rout you out, and by the Eternal God, I will rout you out.” said in 1833 to the Rothschild cartel and the City of London.

      In 1836, Congress does not renew the 20 year charter of the Second Bank of the United States.

  9. Swamp Creature says:

    I believe this 10 year spike is the same trade as the oil spike. They are both going up together. This will end the real estate bubble as I predicted. Refinancing will dry up. Everyone that could will have already done so. Noticed only pristine properties are going up at the 18% rate shown in the Case-Shiller Index. Most of them get snapped up quickly. And like the auto lots, the only properties on the market that are not snapped up quickly are crap you nobody wants.

    • Old School says:

      Whether it’s war, virus research or central banking there seems to be a lot of poor decisions made at the top without negative consequences.

      • historicus says:

        no consequence for being wrong, like in the private sector
        Yellen as Fed Chair said
        The theories we chose to follow were wrong…
        notice SHE was not wrong for choosing them….the theories were wrong

  10. Bobber says:

    The S&P 500 reaches it’s high again and threatens to move higher, so the Fed comes out with some hawk talk. Hasn’t this been the Feds MO all along? Their sole objective is to manage the stock market. They don’t want it to drop, and they don’t want it to rise. They want minimum volatility, even if it means minimum financial stability and minimum opportunity for the bulk of the population.

    • Roger Pedactor says:

      We have needed a major correction for over a decade. But they leveraged everything for their agendas so there is nada left but the market which is what everybody’s retirement is based on via 401s.

      Almost two decades now. Sometimes bad things have to happen. This earnings season should be the last hurrah. Then the bears should feed. Not likely though even if the toolbox is looking shallow for the interlopers on a natural free market (lol.)

      • historicus says:

        Roger…
        Central Bankers decided that the normal corrections and cycles that come with a FREE MARKET ECONOMY are inconveniences and can be ironed out.
        The result, as you suspect, are built up excesses.
        The eventual flush becomes systemic in nature. Enter the central banker to accrue more power and self author new responsibilities.

  11. MonkeyBusiness says:

    All the Fed has to do is increase rates by 1% tomorrow. But no, they want it both ways. Probably because Powell and his cohorts are still fully invested in the market.

    • Nathan Dumbrowski says:

      Believe that they already know the date and rate increase value. They just have to show only the chosen few and perform song and dance.

      Rates increase will coincide with another event. So much “stuff” thrown against the wall that people won’t even notice that small potatoes. Dad used to whack my leg whilst ripping off a bandage from my arm. “Didn’t even feel it, did you?”

    • historicus says:

      Agree.
      The hand wringing over microscopic rate increases, maybe later on perhaps…etc etc…
      1/4 pt raises being considered? Are they kidding? Inflation is 5% or more over Fed Funds….
      NEVER HAPPENED BEFORE and they sit on their hands.

  12. Nick Kelly says:

    “A way of manipulating the data,” he called these efforts.

    Holy Sh%t. I see a lot of comments along the line of ‘so what’ but this is pretty edgy by this guy. Ya, saying your outfit has been manipulative is ‘hawk talk’ alright. I wonder if he ran this by JP? If a corporate guy said this about prior statements, legal would have a bird.

    That is NOT the same old Fed talk, nor is saying interest rates may have to be raised sooner. Some ‘same old’ comments may have be updated.

  13. Jon says:

    Don’t expect any big changes
    Its all dog and pony show
    The real inflation is almost 20 percent on the ground
    Even if they raise the rates by coupon of percent it won’t make any dent on anything in a meaningful way

    Even if the housing market falls down by 20 percent or so .. itd just go back to Feb 2020.
    Same thing for stock market

    • ru82 says:

      My thoughts too. Unless they can come up with a lot on new houses…..I don’t know how you can have a housing crash on low inventory.

      Prices are still going up for consumables. The owner of a major grocery chain said food prices will increase 10% in the next 60 day. He is getting this info from the wholesalers.

      Hopefully it levels off after the 10%.

      • ru82 says:

        Zillow is forecsting a 15% YOY housing increase for October 2022.

        • Jake W says:

          hasn’t zillow bought a lot of their own houses, so that they can have a vested interest in pumping up the market so they can unload their inventory?

        • roddy6667 says:

          Zillow stopped buying new houses. Seems they are having trouble selling what they have. Is the top in for the housing market?

      • Sams says:

        A housing crash on low inventory is possible. At first it may look a bit different, prices do not go down but the market freeze. What happen first on a crash on low volume is that trading come almost to a standstill. No one have the money or is interested in spending the money to buy, sellers do not want to reduce price. Nothing moves.

        After a while a small volume is traded at wildly different prices. Very little on the market and prices that are hit and mis depending on if there is someone with money that need a house or someone that have to sell. If not many have to sell, this situation can last for a long time.

        • COWG says:

          Sams,

          You got it…

          There are PLENTY of houses…

          Maybe just not where you want to live or at a price you want to pay…

          Low inventory doesn’t mean squat…

          Camp out in my front yard and keep making me offers, you’ll eventually get to buy my house…

      • Jon says:

        Actually there is low inventory because rich people are buying multiple homes aka yield chasing
        If the rates are 5 percent or so a lot of shrewd investors would unload their houses and or stop buying more

        Crash is still possible with low inventory

      • Nick Kelly says:

        If you have buying stall, you will see a flood of inventory. Then buying stalls more, then you have a crash.

    • Old School says:

      The thing that is a little strange to me is the price of the two big gold miners. The one I own is minting money at $1700 – $1800 gold and will pay out 4% plus dividend plus has zero net debt.

      It is like the market doesn’t believe gold is going to average $1750 over the next decade. It’s hard to reconcile that with all the money printing and negative real rates. Somebody is wrong..

  14. Depth Charge says:

    To say you’re concerned about inflation while you’re continuing to stoke it with $120 BILLION in QE every month is like an arsonist saying they have changed their ways as they take a blow torch to dry tinder. These guys are pathological LIARS.

    • historicus says:

      Depth…
      Right again.!!

      How many Fed governors are long Bitcoin? One wonders.
      Itty bitty rate hikes with inflation 5% over fed funds….are they kidding?
      Who threw their arm around J Powell in December of 2018 and changed his view of the world?
      Powell, to his credit, got fed funds up to the then 2% inflation. Stocks didnt like that….stocks couldnt handle the reality. Then suddenly Powell is a different person….debt is good, free money to the federal govt is good, and so on….

    • Mark says:

      “A way of manipulating the data,” he called these efforts.

      You mean “lying” ? You mean “deception” ? You mean insider greed ?

      You mean ………….. ” your lips are moving” ?

  15. Mark says:

    1.6% to tie your money up for 10 years and guaranteed to lose at least half to capital losses and inflation. Where can I find some of these saavy investment managers?

    You can buy silver or gold then sell a covered call and get 5% pretty easily. You can invest in stocks that have paid decades of steady dividends.

    • Wolf Richter says:

      Mark,

      Yes, but you can lose 50% too on stocks, for example. With a 10-year Treasury security that you buy at auction from the government at 1.66% yield, and hold for 10 years, you will get face value, plus 1.66% for 10 years. There is not a lot of risk to this calculus. The sun would have to hit the earth for this bet to blow up.

      If you own a stock that pays a dividend yield of 1.66% or 5% or whatever, and then something goes awry, which happens frequently, and the company cuts the dividend, your yield = 0%; AND the price of the stock usually plunges.

      Those are the risks, and they’re different. Risk has a price.

      But yes, a 10-year Treasury at 1.66% is a total bubble yield. It’s totally mispriced, like most stocks today, like most other assets today.

      • Crush the Peasants! says:

        Diversification the best one can do?

        Stocks
        Bonds
        RE
        Cash

        • roddy6667 says:

          Diversify the ways you lose money.

        • Augustus Frost says:

          Exactly, diversifying into three ridiculously overpriced asset classes.

        • Old School says:

          Since I am retired I try use a 3% plus 10 year treasury rule on the dividend after doing my due diligence. So now that means I need a safe stock with a 4.6% dividend. If I can’t find one I just sit in cash.

          I just picked up a pet pharmaceutical distributer with no debt at 4.6% dividend. How is that possible? Well it’s a slow grower and people are paying up for growth and momentum. If you are retired you need the income more than the growth.

    • Covered calls don’t work during high volatility. The premium is too meager to cover the losses, or you are called away and lose the fabulous gains that were a decade in the waiting. Then gold might drop to $800 and there will be none to buy, which is another consideration. When the market falls next time there will be money everywhere, and no sellers. Assets will be closely held.

      • Augustus Frost says:

        When asset markets crash, there will be plenty of forced sellers due to margin calls, from known and unknown leverage.

        There will also be plenty of people desperate to dump currently “valuable” garbage assets: junk bonds, overpriced real estate, SPAV, crypto “coins”, and inflated to the moon cash burn companies “worth” tens of billions if not more that should be worth zero. This is for starters.

  16. Bull&Bear says:

    Wolf,
    I have a tangentially relevant question: if QE is over and FED stops buying the treasuries, how will the federal government fund the 2 trillion social program plus 1.2 trillion infrastructure bill? Will the US10Y rates have to inevitably go up to attract investors? Would the FED rate mean anything for treasuries at that point?

    • Wolf Richter says:

      It will simply pay higher interest rates to make those Treasuries attractive to more buyers. There will be lots of demand if the yield is high enough. I might buy some if the yield is high enough. That’s how demand problems get solved. You just have to offer a better deal, and then there’s lots of demand.

      “High enough” changes. The first buyers demand x% yield, and once they bought, buyers dry up until the government offers a better deal at y%. And so on. You’re seeing that in the chart above already. That’s what is at work here. Everyone has their own calculus about “high enough.” There is no agreement as to what “high enough” means. Some are sellers at y%; others are buyers at y%. And that’s what makes are market.

      • Bull&Bear says:

        But at higher interest rates servicing debt would become costly, right? And then federal government will have to cut on social programs again (I’m sure they won’t cut other large programs like defence/social security)?
        I just don’t see how the government plans to fund it (let’s assume no significant tax hikes for now)

        • JeffD says:

          A 0.25% interest rate hike on $30 trillion government debt comes out to a government cost of $75 billion per year. The Fed is spending almost double that *per month*. Frankly, the (much!) cheaper option *for government* would be to hike Fed Fund rates by 0.5%.

        • historicus says:

          Bull…..
          Debt creation MUST become more costly, lest we continue to get more and more of it.
          The argument of “raising rates will be too costly” is vapid.
          The costliness of it all is why debt creation must be moderated to levels that fit reality.
          I can detect a source for about $120 Billion a month for debt service….(turn the QE to interest payments)
          The MMT game that “debt is okay because the beneficial effects out weigh the bad” is a joke.
          What they leave out is that the debt is only okay if the GOVERNMENT controls the proceeds.
          They dont want the debt to go to debt service and interest payments do they? They couldnt control that. But that money would be injected into the economy by the holders of the debt as THEY saw fit, wouldnt that a good thing too?

        • historicus says:

          JeffD

          How about the $120 Billion a month of QE be redirected to debt service?

        • Wolf Richter says:

          Bull&Bear,

          “But at higher interest rates servicing debt would become costly, right?”

          Not in the overall scheme of things.

          1. Most of that $28.8 trillion in government debt doesn’t come due for years, and the cost of that debt doesn’t change at all until it matures and needs to be replaced with new debt at the current rate. Nearly all of this debt has higher interest rates than the current rates.

          So when that 10-year Treasury with a 3% coupon gets replaced a few years from now with a new 10-year with a coupon of 4%, it doesn’t make a lot of difference in the overall deficit of the US.

          And there are 30-year bonds out there with coupons of over 5%, and they might actually be cheaper to replace when they mature, and the government might save some money on interest.

          Much of that huge pile of borrowing that was done since March 2020 won’t mature for years, and won’t have to be replaced for years.

          2. Interest income from Treasury securities is taxable for USians, and the government will get back as tax revenues some of the money it pays out in interest.

          3. The government has racked up huge deficits for decades – that’s how it got that $28.8 trillion in debt – and adding a little additional interest expense to those huge deficits makes no difference. What makes the big difference is constantly adding trillions of dollars to that debt via deficit spending.

          But I wouldn’t mind if pork-barrel spending gets cut to zero, and if the corruption defense and intelligence budget gets cut in half. But that’s not going to happen. That’s bipartisan dogma.

        • Taper only means they aren’t buying new bonds, they are still rolling over the bonds they already have on their balance sheet. If as some suggest Treasury curtails new issues then this process will mean the Fed is buying more by rolling over debt, than new debt is being sold. They still own the bond market going forward.

        • Ron says:

          CREDIT

      • Auldyin says:

        Absolutely!
        Historically and theoretically, the US 10yr Treasury sets the World Wide yield for a zero risk investment. If you believe the US will continue to exist that is (joke). Everything else should carry a yield premium to that.
        Again theoretically, that yield should be set by the surplus or shortage of money in the World looking for a zero risk home against the available stock of treasuries. The fact the rate has been so low for so long tells you that there has been a surplus of cash looking for a home. Where did that cash come from? Yup! QE again.
        Lags and flows, if QE stops, rates can only go one way. The speed will depend on how quickly growth or Fed sales swallow up all the surplus cash, or not, as the case may be.
        I’ll believe QE stops when I see it happen for keeps.

    • Petunia says:

      I wouldn’t put 5 cents into this market. A 1.66% yield is a desperate attempt at pretending to be an investment instrument. My credit card interest rate is just under 25%, that’s the real market interest rate on a short term unsecured loan.

      • Depth Charge says:

        How about BitCON?

      • Old School says:

        Yes, but Fed makes it hurt with -5% real yields. They have screwed up pretty badly by creating biggest world wide bubble of all times. Can they manage it without causing bloodshed might be the question.

  17. ru82 says:

    Even though prices are rising…..retail sales increased 8% Month over Month and 10% excluding vechicles.

    No wonder Macys and Costco stock prices took off as well as XLY ETF (consumer discretionary stocks) broke out and is surging to new all time highs.

    I noticed miles driven is pretty much back to pre covid.

    • Paulo says:

      The miles driven will drop off PDQ with the current rise in fuel prices and everything else robbing the wallet these days.

      When it’s time to cut back….. unnecessary driving is very low hanging fruit. Then comes dining out, decent groceries, rent payments, clothing purchases, mortgage payments. Pretty soon the cries begin for Govt help in all sectors. And here we are, living in the world of no consequences.

  18. ru82 says:

    I wonder why the Treasury Inflation Protection bonds (TIP) keeps dropping. It has been dropping for 2 months and guess that means inflation has been dropping the last 2 months.

    I do not understand this at all. Basically the TIP price is the same as it was back at the end of January. So we have not had any inflation this year?

    Is there some type of manipulation going on?

    • Wolf Richter says:

      Fed is a huge buyer of TIPS. People need to stop looking at TIPS as a market expectation of inflation. The only thing they measure is Fed buying.

    • You’re paying the premium on inflation expectations, which are always wrong and there is a tendency for buyers to create large differences in price for a small relative move in yield and inflation. You buy when Tip bonds when they are out of favor. The price of the ETF reflects too much liquidity sloshing around, and means nothing.

  19. Old School says:

    Seems like the USA is over invested in everything digital and under invested in everything that is physical.

    • Seneca’s Cliff says:

      Imagine if we were over-invested in power plants, water treatment, high mileage freight trucks, machine tools, and well equipped trade schools ( to name a few things) instead of digital puffery.

      • Island Teal says:

        “digital puffery” is very important to far too many people that are basically clueless to most of what you deemed more important. Just like the current crop of “supply chain experts”. We are in real trouble 😬😬😬

      • Nick Kelly says:

        The high end machine tools CNC etc. are computer controlled. As are power plants. I am old enough to have used a typewriter and ‘whiteout’. The word processor may have saved more work than anything.

        Trying to separate a productive economy from ‘digital’ is like trying to separate it from electricity.

        But it wouldn’t hurt to lose social media.

        A personal re: FB. A few years back when I stuck my toe into FB, I happened to ask a younger, somewhat troubled young lady if that was her natural hair color. I thought I was writing to just her but it was the public ‘wall’
        She was very upset.

        • Depth Charge says:

          Asking a woman that is like asking her what her dress size is. What did you think her reaction would be? “Public wall” or not, you failed.

        • COWG says:

          Damn, Nick…

          Purple is nobody’s natural hair color….

        • Wolf Richter says:

          Nick Kelly,

          One of the great things about the comments here is that you get free advice about everything, from buying stocks to marriage counseling. So here we go, you’ll get some free advice:

          You should have said: “Nice hair.” Or maybe “beautiful hair.” And let her run with it. If she tells you it’s red dye #3, then fine, and if she tells you to go take a hike, fine.

      • Augustus Frost says:

        You are describing Asia, where the center of economic gravity is shifting, followed by geopolitical influence.

        But then, this country and the west generally is full of people who believe it’s possible to “print” your way to prosperity and that ridiculously overpriced perpetually money losing companies which don’t produce much if anything represent real wealth and the basis of a real economy.

  20. Anthony says:

    Sometimes there are hidden things than can often explain shortages and rises in inflation. I don’t think this applies in the US but here in the UK evicted families have to, by law, be “rehoused” by the local council. The problem in London for the refugees from Afganistan, is that there are 165,000 families waiting to be rehoused already. They are “temporarily” put in temporary accomodation.(a room in a hotel or hostel) until a home can be found. This, on its own explains part of the house price inflation, including rent inflation.

    So, when they talk about inflation being temporary, often they have no idea of these “hidden” reasons. I’m sure the USA is full of “hidden” reasons that the Fed has no idea about or doesn’t care about( maybe one is preppers stocking up with 20 years of food and other stuff, who knows) and because of that you can be sure that inflation and supply log-jams will be here to stay.

  21. fred flintstone says:

    All these dudes saying worse inflation means the market drops……they don’t get it……worse inflation means nominal earnings will be higher…..and rates……after inflation and taxes go even more negative. Market to the moon…….until the collapse in consumer demand triggered by the Weimar effect.

    • Bead says:

      Could be the flameout: the smalls goosing the market in their attempt to stay out of the labor force. I don’t believe the CW about “workers on strike.” The vast government income supports will eventually run out.

    • historicus says:

      Inflation, unaddressed by the Fed, is just as you say.
      Inflation addressed by a competent Fed who serves the working, earning, and saving people of this country…..would not be bullish.

      We are in a dystopia potential.
      IF the Fed begins raising…as they should…..several 1/4pt raises (at least)
      it may not be enough to tamp down inflation.
      BUT it could be enough to roll the stock market over.
      In stocks….lose
      In cash…..lose to inflation
      Wealth destruction. And perhaps this situation is possible is because the massive creation of wealth was a little on the artificial side, subsidized by the Fed, and this would painfully drain off some of the fake wealth.

      • Old School says:

        Picture Yellen and Powell having a Thelma and Louise moment as the car picks up speed. They are trapped, but are they going to hit the brakes or not. We all wait for the end of the movie.

  22. Anton says:

    Wolf. Have you considered the possibility that the story we are telling about inflation is wrong? The current belief is that the Fed bravely acted in the 1980s to crush inflation with interest rate hikes. However that crushing coincided with the rapid rise of offshoring to places like China, countries that kept inflation at bay with ever increasing efficiency gains. We essentially imported deflationary forces into the economy by offshoring since it made American workers compete more globally, keeping down wages and also allowed the US to gorge in cheap foreign goods. We now seem to be importing inflation with China raising its prices. What happens if we raise rates but the pride of goods keep rising anyway since we have no control over input on the other side of the world?

    • historicus says:

      Anton..
      Agree we imported deflation for years from the Chinese …
      You wonder whether raising rates will help the current situation…
      What is for certain is the NOT RAISING will exacerbate and continue the cost free debt creation in this country.
      Having rates below inflation, with gimmicks like QE, subsidizes debt creation…..and when you subsidize something, you get more of it.
      We dont need any more debt.
      For 7 decades….even before the 70s inflation, Fed Funds almost always equaled OR EXCEEDED inflation. Now a record 5% below.
      Your questions are valid, but for certain, we are in an ABNORMAL monetary condition, set up by the Fed, to address some “emergency” that doesnt seem to be there. IMO.

      And is it not incumbent on every generation to pay its own debts?
      Since 2007, we have added over $21 Trillion in national debt, essentially stealing from the future to fluff the present.
      For the first 215 years of this nation, the national debt was $9 Trillion…
      last 12 up $20 Trillion.

      • COWG says:

        Anton,

        Mostly, correct, I think…

        But I think what you missed was the shift to services and financial economy…

        We offshored the manufacturing but didn’t replace it with other manufacturing… so we weren’t actually competing globally with what we offshored…

    • Wolf Richter says:

      Anton,

      In terms of durable goods inflation, which is what you’re talking about, there is some of that. But 3 things about durable goods inflation:

      1. Durable goods are the smallest part of the consumer basket (services are two-thirds; and nondurables, such as food and energy are bigger than durables in the basket).

      2. Durable goods inflation has been pushed down over the decades by ever more efficient manufacturing and transportation networks, as it should be, and by offshoring to cheap countries, which is not a great idea.

      3. Durable goods inflation since the mid-1990s has been misreported in CPI due to over-aggressive application of hedonic quality adjustments, resulting in the appearance of two decades of no durable goods inflation in things like motor vehicles, though they have jumped in price.

      In terms of your question:
      “What happens if we raise rates but the pride of goods keep rising anyway since we have no control over input on the other side of the world?”

      1. You have to connect demand and supply. And it was government deficit spending and Fed money printing since March 2020 that unleashed this enormous this burst of demand for durable goods, and also for other things, such as home purchases, etc., which hit supply constraints and started to push up prices.

      This stimulus MUST be taken off, and demand will drop back to more normal levels, which will end the rampant price increases (though there will be some price increases).

      2. There is a lag between slow monetary policy changes (such as we’re looking at now) and transmission of those policy changes to the economy. The lag has been estimated to be between 1-2 years. So if the Fed raises interest rates in June 2022, and continues to raise until they reach some significant level, from the point that they reach that level, it may take 1-2 years before the economy (prices) react.

      So if the Fed raises by 25 basis points, nothing is going to happen to prices, and inflation will continue to rage. People who expect the first rate hike or two to end inflation need to look at the late 1970s and early 1980s.

    • Nick Kelly says:

      China ‘s exports in early-mid eighties were negligible. The place was barely functioning. US deficit with China in 1985 was 6 billion. So there is no question of China being in any way responsible for the Fed’s actions then.

  23. Mendocino Coast says:

    If Everyone simply removed all their funds from all the banks
    and credit unions all in a week or so then they will raise the rates
    the Fed rate needs to get a strong message and its not getting it
    However, how is that going to happen people must come together ?
    Perhaps if everyone places their funds out of the country that might
    get attention lol Wolf can you email the entire USA please
    RAISE THE FED RATE NOW OR ?

    • historicus says:

      First People have to realize they are victim to an ARRANGED THEFT by the Federal Reserve.
      We arent even close to that yet….

  24. Les says:

    They also strip out real estate taxes, HOA fees, and maintenance costs claiming that these support the investment component of shelter in the CPI. This contradicts the repeated claim that housing price increase can’t be used since it consists of part consumption and part investment. They probably should also add back in the depreciation as a cost increase if they’re going to treat the category as investment.

    The BLS replaced the housing indicator with owner-equivalent rent in 1983 to bring down the CPI. There was also the effect on crude oil prices in the 1980’s from the strong dollar due to interest rates, the Iran-Iraq war, and the new production from the Gulf of Mexico and Alaska.

  25. DR DOOM says:

    The Fed will keep jawboning untill their political masters, Congress feels the heat from the electorate. The electorate is apparently paying more and believes Congress will make up the difference with more free money before the election or if needed before the election. Everybody saw the purchase of the senate seats in Georgia and they believe this is the new political relationship. We have crossed the 50% threshold of the number people now expecting free money from government. There is no way to run a political campaign against free money once the electorate threshold is crossed. Old dead white guy named Ben Franklin pointed this out when we became a constitutional republic with democratic representation. perhaps Hamilton is now looking to be the old dead white guy with the greater vision. This is an old true story that unfolding . It has always been the sword above our head. The Federalist Papers are in play again. At the end of the day The Fed is just Congress’s money bitch and they and their connected interests along with Congress have plundered wantonly the people’s wealth. The question in play is about “we the people” and where “we” go.

    • Depth Charge says:

      CONgress is on the record saying “this is not the time to end the easy money policies.” They are destroying the country and don’t care.

  26. Citizen AllenM says:

    Trends ride for a long time, making inwestors feel like geniuses when they just rode a pony to Birmingham.

    Now the trend has changed. Think that through for a while.

    Right now we have shortages in everything, but soon there will be plenty of overpriced supply.

    Higher interest rates, lower asset prices, period.

    Then what?

    Now the trend has changed.

    The odds are this trend will go on a lot longer than you guys think.

    And currency will buy less and less. But not Weimar. After all, the lesson of the 1980s is that interest rates can go high enough to choke the real economy.

    Now tell me how trees go to the moon.

    We overlay our emotions, hopes, and expectations onto the future.

    Look at today. Right now we have had a huge boom in building in America for decades, yet we have shortages in housing and everything?

    Sure. So why are so many houses barely used? Oh yeah, asset parking while asset inflation enriches.

    LoL.. Houses are for living in, not as tools of financial speculation.

    When the leader of the communist party in China points out the obvious, one should be very afraid that the trend has changed.

    Small savers always lose, it should be a mantra.

    Now, when the big guys lose, the Fed must bail them out, right?

    That put is only good til Tuesday….

    Now comes winter again…but nobody is ready, and what if the last big Great Recession is to be followed by a bigger one?

    • MonkeyBusiness says:

      The Fed mandate is higher than the mandate of Heaven. Just remember that.

  27. Craig J Steele says:

    I believe the gang at the Fed has put themselves with their backs tight against the wall. They have done their due diligence when it comes to transferring wealth to their bosses. But the disinformation and manipulation of numbers cannot put any additional lipstick on this pig. We are ready for a wild ride ahead where the plug gets pulled on the little guy by the machines. Big money and Algos are already sneaking out the back door. I can always tell when GS starts pushing a melt up prognosis to the general market while telling the big boys to leave the theater before the fire breaks out.

    • MonkeyBusiness says:

      ” plug gets pulled on the little guy by the machines.” Most stocks are owned by the super rich. We are now at a place where the rich will have to eat other rich.

      • Jake W says:

        they don’t even need that. without little guys looking to buy in, the values collapse. thin volume and all that

        • MonkeyBusiness says:

          Nope, the Fed can always buy things behind the scenes. If they get caught later, no one will be arrested let alone jailed. We have the Fed Chairman, his minions and members of Congress trading on inside info. This is truly the end times.

  28. Jay says:

    When measuring inflation, it makes no sense to:

    1) Remove food costs
    2) Remove energy costs
    3) Ask homeowners’ their equivalent rent

    Stop trying to slice and dice inflation. Just measure it accurately, if that’s not too much to ask. And is it too much to ask to actually look at real rents and home sales?

    • gametv says:

      They should also start to actually publish the methodology and the hedonic adjustments they make so that it is an honest measurement of inflation. And make sure to include a true measure of housing costs, including house prices in the inflation measurement.

      I would also like for them to create a “working class” inflation measure, which would properly account for healthcare costs, higher education and housing in the inflation measures. Those are the 3 areas where prices have run rampant, but are not properly reported because 1) healthcare costs are borne by employers to some extent, 2) higher education is not properly factored in due people who cant get it due to a lack of affordability (we should assume that higher education is a requirement for everyone) and 3) housing that doesnt measure price differences, but a rent equivalent, which is a false measure because during falling interest rate times housing prices rise as monthly payments can be kept low. So this measure would be a real honest assessment of what it takes to live a middle class lifestyle in the United States, as defined by proper health insurance, a good college education for your kids and owning a home. Because it is the middle working class and small business owners that are getting SCREWED by the Fed.

  29. Swamp Creature says:

    Our water company WSSC just announced a rate increase of 9%. Nobody waters there lawn now because of the high water bills. Its going to look like Saudi Arabia here next summer.

    • Wolf Richter says:

      Rock gardens or native plants. San Francisco yards have been switched to that a long time ago. And brown is nice too. You can call it “golden.” Sounds better. That’s what we do.

      • DR DOOM says:

        I hate mowing grass. I have an acre around my house with tress and shrubs in the way. I told my wife that I wanted to cover it with road-bond and paint it green. She said after a long pause that the grass will just grow through it and I will spend more time repairing our two mowers due to the rocks. Mowing sucks,mower repair double sucks. She finished me off with the Yogi B. quote that if you don’t think too good then don’t do much of it.

  30. DawnsEarlyLight says:

    Ooooh, now it’s down to 1.64%! A whopping 2 hundredths of ONE PERCENT!

  31. Spencer Bradley Hall says:

    The economy is being run exactly backwards. You tighten monetary policy and drive the banks out of the savings business. What would that do? It would make the banks more profitable, if that is desirable.

    It would unleash savings. The only way to activate savings is for their owners, saver-holders, to spend directly, or invest, directly or indirectly, outside of the payment’s system.

    If you don’t understand that, you don’t understand economics.

  32. Auldyin says:

    “Meanwhile, wage gains have been strong. That apparently has not made its way into prices yet, but how long before it becomes a factor driving inflation?”
    IMO that’s the biggy!
    If folks don’t get pay rises, inflation will make them poor very quickly and they won’t be able to buy stuff. Which will mean prices could revert to some extent. Hence ‘Transitory’
    On the other hand, if folks get equivalent pay rises they will be able to carry on buying at the new higher prices and inflation will be a one-off.
    If pay rises go faster than prices we’re off to the good old 70’s again. My bet is that people are starting to like pay rises and there could be a battle to keep them in check. John Deere??? etc etc.

  33. Rowen says:

    The three key drivers of disinflation during the past 40 years are job insecurity, immigration, and globalization. All three are in the process of unwinding, plus the additional organic growth of 500M-1B people in the global south ascending to middle class lifestyles.

    Without massive investments in output, there’s gonna be inflation and shortages. Buckle up.

    • The Real Tony says:

      The only people with money are the retired boomers and negative real interest rates will eventually put most of them into poverty like the rest of America. Deflation like Japan is the most likely scenario and would have been the only scenario but the Fed stuck their big nose into everyone’s business and rigged and manipulated and distorted everything. The last thing the Fed will do to create inflation and bankrupt all Americans is decimate the U.S. dollar.

  34. The Real Tony says:

    All rate hikes are good news at least for me. None of this crap today would exist if America didn’t go off the gold standard.

    • Swamp Creature says:

      Same here. I’m salivating over the prospect of higher interest rates.

    • Randy says:

      All by design to enrich the Rich. We no way could have the economy we have now without fiat currency. It got the consolidation going, buying up old mom and pop businesses and making sure there could be none to start up again to compete against the conglomerates. With mergers and acquisitions were down to just a few companies in every field. With the plandemic it decimated the last of small business. Look how it went. It was safe to go to Wally World where thousands of people go a day but not safe to go to your local bar, restaurant or barber. Now what kind of logic is that? Fiat works out great for government and corporations who borrow money for nothing. Default on our debt is coming soon. The dollar wont have the value of toilet paper. And for those naysayers out there. Why do you think were on fiat? Because we defaulted on our obligations to give gold for dollars. And we dragged the whole world into a game of fiat with us. This is a fake economy a financial economy non sustainable. We have to rip each other off by finding another sucker to sell higher to. We produce nothing but financial gimmicks. Look at all the financial gimmicks and there just getting crazier. Derivitives, ETF, Crypto, NFT anything and everything. Whats the next financial gimmick we will invent to sell? Only going back to a sound money system will fix it. Until then the Rich will become Gods which I believe were already at that point.

  35. Randy says:

    They cant stop QE the whole ponzi scheme would crash. Inflation is running hot 12% to 13% not that headline number. Ive seen items at the grocery store running at 50% inflation, gas is 30% higher. I’ve got one rule i go by, never believe anything the government or its affiliated agencies say. Then you have the crazy way they figure inflation for stuff like technology. Oh your cell phone only went up by 2% inflation because we calculated for its speed or some other BS. Well in reality it went up 150% because your old cell phone is now obsolete. You see how thinking outside the box works? How could it only go up 2% if i have to replace my old one that is now useless? Remember this, the government is the enemy of the people, always has been and always will be.

    “The government is good at one thing. It knows how to break your legs, and then hand you a crutch and say, “See if it weren’t for the government, you wouldn’t be able to walk”.” ~ Harry Browne

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