Powell managed to pull the rug out from under some widely held assumptions.
By Wolf Richter for WOLF STREET.
At the post-meeting press conference today, Fed Chair Jerome Powell managed to pull the rug out from under some widely held assumptions:
- QT could continue even if and when rate cuts begin next year.
- Additional rate hikes are on the table – “hikes,” plural, not just one more, as per dot-plot projections from the last meeting. Plural brings the top of the rates to 6%.
- No automatic pauses between hikes (hike-pause-hike-pause). Rate hikes could happen at any of the remaining three FOMC meetings this year, including at the next meeting in September.
- Inflation not vanquished. The “one good reading” of CPI (June) was nice, but “it’s just one reading as everybody knows. We’ve seen this before in the data.”
Powell’s press conference followed the FOMC announcement of a 25-basis-point rate hike to 5.5% at the top of the range, with plural rate hikes still on the table, rather than just one more (I discussed the details here). Neither the statement nor Powell pronounced “6%,” even though Powell seemed to be itching to, but plural means 6%.
Rate cuts while QT continues “could happen”: He was asked if the Fed will cut rates next year while continuing QT. “That could happen,” he said. He referred to it as “normalization” of rates being cut toward some normal neutral level while the balance sheet gets trimmed to some normal level.
“These are two independent things. The active tool of monetary policy is rates. But you can imagine circumstances in which it would be appropriate to have them working in what might be seen to be different ways, but that wouldn’t be the case.”
Automatic pauses between hikes discarded. “We haven’t made a decision to go to [a rate hike] every other meeting. We’re going meeting by meeting. As we go into each meeting, we ask ourselves the same question. We haven’t made any decisions about any future meetings including the pace at which we consider hiking. But we’re going to be assessing the need for further tightening that may be appropriate,” he said.
Two more rate hikes to 6% over the next three meetings? “So a more gradual pace doesn’t go immediately to every other meeting. It could be two out of three meetings,” he said. And later he added: “I think it’s possible that we would move at consecutive meetings. We’re not taking that off the table. Or we might not. It really depends on what the data tells us.”
September a “live” meeting? “I would say it is certainly possible that we would hike again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady at that meeting.”
“Keep moving” at “the right pace” amid the “uncertainty”: “It’s not an environment where we want to provide a lot of forward guidance. There’s a lot of uncertainty out there. We just want to keep moving at what we think is the right pace. I do think it makes all the sense in the world to slow down as we now make these finely judged decisions. So that’s what we did.”
“The worst outcome for everyone would be not to deal with inflation now. Not get it done. Whatever the short-term social costs of getting inflation under control, the longer-term social costs of failing to do so are greater. The historical record is very, very clear on that. If you go through a period where inflation expectations are not anchored, where inflation is volatile and interferes with people’s lives and economic activity, that’s the thing we really need to avoid and will avoid,” he said.
People most hurt by inflation: “We think the single most important thing we can do to benefit those very families, especially families at the lower end of the income spectrum, is to get inflation sustainably under control and restore price stability. We think that’s the most important thing we can do and are determined to do that,” he said.
“I would point out the people most hurt by inflation right away are people on a low fixed income. When you are talking about travel or transportation costs, heating costs, clothing, foods, things like that, if you’re just making it through each month on your paycheck and prices go up, you are in trouble right away. Even middle-class people have some resources and can absorb inflation. People in the lower end of the income spectrum have a harder time doing that. So we need to get this done. And the record is clear, if we take too long or if we don’t succeed, the pain will only be greater.”
Resilience of the economy and inflation: “The strength of the economy overall is a good thing. It’s good to see that, of course. You see consumer confidence coming up and things like that. That will support activity going forward. But you’re right though. At the margins, stronger growth could lead over time to higher inflation and that would require an appropriate response for monetary policy. So we’ll be watching that carefully and seeing how it evolves over time,” he said.
The “one good reading” of June CPI: “We did have the one good reading and we welcome that. But it’s just one reading, as everybody knows. We’ve seen this before in the data. Many forecasts call for inflation to remain low, but we just don’t know that until we see the data. So we’ll be focusing on that,” he said. “We’re going to be careful about taking too much signal from a single reading.”
Long way to go, not restrictive enough: “What we see are those pieces of the puzzle coming together and we’re seeing evidence of those things now. But what our eyes are telling us is that policy has not been restrictive enough for long enough to have its full desired effects. So we intend to keep policy restrictive until we’re confident that inflation is coming down sustainably to our 2% target. And we’re prepared to further tighten if that is appropriate. We think the process still probably has a long way to go.”
In his prepared remarks, Powell also mentioned the long way to go: “Inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to two percent has a long way to go.”
Do more: “We’re going to be looking at the incoming data to inform our decision at the next meeting if we need to do more. If it does tell us to do more, if that’s our view, we will do more.”
All eyes are on core inflation: “We think and most economists think core inflation is a better signal of where headline inflation is going. Headline inflation is affected greatly by volatile energy and food prices. So we would want core inflation to be coming down. Core is signaling where headline is going to go in the future.
“Core inflation is still pretty elevated. There’s reason to think it can come down now, but it’s still quite elevated. So we think we need to stay on task. We think we’re going to need to hold policy at a restricted level for some time, and we need to be prepared to raise further if we think that’s appropriate,” he said.
First rate cut “a full year from now?” “It would depend on a wide range of things. When people are running down rate cuts next year, it is a sense that inflation is coming down, and we’re comfortable it’s coming down and time to start cutting rates. But there’s a lot of uncertainty between what happens in the next meeting cycle let alone the next year, the year after that. So it’s hard to say exactly what happens there.
“Many [FOMC participants] wrote down rate cuts [in the dot plot] for next year…. That’s just going to be a judgment that we have to make then, a full year from now. It will be about how confident we are that inflation is in fact coming down to our two percent goal.”
We’d be “very careful” about cutting rates: “The federal funds rate is at a restrictive level now. So if we see inflation coming down credibly, sustainably, we don’t need to be at a restrictive level any more. We can move back to a neutral level and then below a neutral level at a certain point. We of course would be very careful about that. We’d really want to be sure that inflation is coming down in a sustainable level. I’m not going to try to make a new miracle assessment when and where that would be, but that’s the way I think about it. You’d stop raising long before you got to 2% inflation. And you’d start cutting before you got to 2% inflation too – because we don’t see ourselves getting all the way back to 2% until 2025 or so.”
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In Canada, people are actually expecting that the BOC will cut rates so that people will get FOMO and pay a few million dollars on a wooden hut in the middle of Ontario wilderness.
The BOC has specifically un-paused in order to stop this sort of thing.
Translation of ‘pause’ by BoC: ‘let’s see what the Fed does.’
Wolf, can you do an article on how much interest the federal government will pay at these high interest rates? How does it compare to other spending like defense, ss. Also projections before it defaults. Ok, that last one was my permabear wishful thinking.
Once a quarter, I do an article on how much tax revenues the governments gets and how much interest it pays, and what percentage of tax revenues goes to interest. This chart was the latest. Bloggers that just talk about the spiking interest without talking about the surging tax revenues are morons:
https://wolfstreet.com/2023/05/29/update-on-the-us-governments-holy-moly-debt-interest-expense-and-tax-receipts-and-how-they-stack-up-against-gdp/
Good question. Brings to mind the O’Neill/Reagan compromise.
Can you remind me which Act in the “Ronnie Saves America” script that “compromise” appears in?
Was a long sad movie. Thanks.
“You’d stop raising long before you got to 2% inflation. And you’d start cutting before you got to 2% inflation too – because we don’t see ourselves getting all the way back to 2% until 2025 or so.”
Dovish statement, that’s why stocks keep pumping again today.
It’s not “dovish.” It’s just not stupid. When inflation falls far below the federal funds rate, the Fed is going to cut. And it should. That’s how it is and is supposed to be, and when people say that policy rates should stay at 6% when core PCE is 3% and heading lower, they are just being silly. Everyone knows that except the moron reporter who badgered Powell with those questions.
The question is: Will core PCE will fall to 3% and head lower? And when? That’s the other question. And there is a lot of uncertainty about that. It could be YEARS.
And with every meeting, the Fed gets closer to acknowledging that it could take YEARS. So if core PCE doesn’t significantly drop, the Fed won’t cut rates.
It’s going to get really ugly. In the hyper financialized US, the stock market is wagging the economy (which is insane, but here we are). CEO incentives are exclusively driven by stock prices, not the real world. That’s why layoffs started last year due to the market pullback, and that’s why employment is rebounding on stocks going up.
Inflation will not stop until the stock market crashes. The Fed is not done. Will they do what it takes?
PID (Proportional/Integral/Derivative) functions are used in a lot of control systems, often for temperature and motion control. Inputs are monitored and outputs are engaged based on not just the values read by the inputs, but also by the rate or change in the inputs. PID systems act on the trend rather than current input values.
In temperature control, a heater might run at 100% duty cycle (full blast) early on in a heating routine. But as the system gets closer to it’s target temperature, the heater’s duty cycle will steadily be decreased long before the system reaches its target. This way the target temperature is reached smoothly without overshooting, and the heater will continue to run only a the duty cycle high enough to maintain the target. If some other heat source or heat sink is introduced unexpectedly, a PID control loop will detect the fast rate of change and adjust it’s outputs accordingly.
I’ve often wondered why economists at the Fed don’t simply establish a PID control loop for interest rates. Then I realize that their goal is not actually to have perfectly stable pricing… They don’t work for us peons. Their goal is to make their masters happy, and we certainly are not their masters.
I hope so. It seems that Canadians with the means would rather buy a rental property and collect rent from a planned growing population than to invest the money into the economy.
In Canada we are governed by and for rentiers and oligopolists.
When is the next “biggest housing bubble in Canada” please?
We need the world’s biggest social experiment well tracked. All this is going to end up in economic papers some day.
Huge housing inflation.
Immigration at greater than 2% of the population *per anum*.
Masses of land everywhere in a land pyramid scheme, with zoning controls creating artificial scarcity.
Every news outlet singing from the same hymn sheet.
Shops totally empty whenever I go anywhere (and I’ve just been in 3 provinces in several places).
Reality was knocking at the door, now it’s started thumping, soon it’s going to kick it down.
Don’t forget amortization periods for a significant percentage of outstanding mortgages now extended decades past original maturity.
It is interest only land in effect. Wonder how that will end?
Yes agreed, Canada has essentially banned price discovery.
Again this is completely insane.
What is the plan of these innumerate lunatics?
There is exactly the same thinking in the UK. Core inflation drops 0.2% and all talk is that mortgage rates will drop and the party to continues. The media actually ran a story confirming that the 2 year mortgage rate had dropped and though it wasn’t a lie I wouldn’t call 0.02% a game changer.
This week’s inflation busting price increase was a pint of prawns/shrimps .
Up from £2.50 to £3.50 !
FT journalists are so desperate for mortgage rates to drop.
Just like Canada the BoE doesn’t set rates. The Fed does.
The BoE had a brief experiment with lower rates than the Fed.
The result? Big inflation.
Now they got the memo.
FT journalists only have access to the BoE, they aren’t a US media outlet.
Therefore they will never say “our access to the BoE top brass is meaningless because the BoE don’t set rates”. Instead they pretend, the BoE pretend, and the public don’t think.
I’m in Canada. Both my kids get top marks in their class.
But when I see Canadians thinking patterns I feel concerned.
Why can’t they understand that the BoC always has to set rates as high or higher than the Fed? And then from that it follows that the BoC do not set rates, the Fed do.
The biggest advantage the Canadian housing market has? Nobody understands how prices are set. Raising rates here did nothing to sentiment. Why? Because nobody looked at higher rates and thought “people can borrow less and available credit sets prices”.
They stuck with the same heuristic they’ve used for 15 years: “my house is similar to that other house, it sold last year for 900k, housing always goes up so my house must be worth $1mm”.
Only job losses and forced selling will penetrate the Canadian skull.
Living here is like being in the Truman show, but with way, way more expensive Tuna.
The issue is no-one in Canada thinks of $ as something earned or invested. It is just something borrowed.
Borrow from parents, borrow against property value, borrow from gold dealers. Borrow – not their money. So bid 10% above ask when you cannot afford the ask. Easy! Just find a way to scrape more together through borrowing.
Humdinger housing bubbles are when they get to 10 X income. That’s dynamite waiting for a match.
Most are opting for 2 year mortgages but if The Bank of Canada keeps raising rates then many will get sucked into taking longer term mortgages because the 5 year rate is a lot lower than the 2 and 3 year mortgage rate. It looks like home prices in Canada will make new highs in the fall of 2024 as the Fed in America will cut rates somewhere between March and June 2024. My money is betting heavy on the first rate cut being around March 2024.
Howdy Folks Waited all day and found the truth here…. THANKS
Wolf – that’s a great chart showing interest expense vs tax receipts.
Thanks
If we go into recession one year from today I think the interest expense on the debt with be around $1.5 T and tax receipts will be in the crapper. I am sure the Fed can pull another rabbit out of its hat so we keep the economy rolling along.
They will just fire up the printing presses again!
I hate to be standing, naked, alone as the first opinion. I think the Fed is doing a credible job given the magnitude of turmoil that switching from an extreme monetarist economic system back to a social democratic system.
Which is basically the American system since we revolted against the English aristocracy a historically short time ago.
When Powell said something like ” we think that the current monetary policy is restrictive”, my heart skipped a beat, given the reflation of the asset value bubbles of stocks, bonds, and housing while they paused.
That took the wind from my sails, and I walked away with that familiar feeling that someone may be putting whipped cream on a turd sandwich meant to be consumed by the taxpayer, like last time.
And he says that the day the NFCI of the Chicago Fed showed yet another week of loosening financial conditions. Made no sense to me. My credit card company raised my limit by like $7k (I think at least that) this past weekend out of nowhere and sent me an email about it, which made me laugh.
Some things have definitely tightened, and by quite a bit, such as bank lending. Other things have not. Junk-bond land is still pretty loosey-goosey.
I may be wrong, as I am often but I think the entire interest rate structure is loosey goosey. In my humble opinion, the last 18 years of QE synthetic interest rates has trained a financial world that risk is an abstract concept of something that might happen.
I understand the supply of junk bonds is very low which may be part of the cause.
My credit card company sent me a glossy flier to tell me that I can open up a 4.0% savings account “that can take your future to new heights”. I thought that was pretty cool. The same day I they sent me a drab disclosure statement telling me they can charge me up to 29.99% interest. I thought there ought to be a law.
Borrow at 4% to lend at 30%. What a great business model.
Go ahead and do it if you think it’s so easy. Unsecured debt is not for the faint of heart. Massive oversimplification.
Have a credit card with a TBTF which I only use every 3 -5 years or so for the balance transfer low interest deals. Get offers from them in the mail on same every month or so. Now they have cash advance deal just like it. Never saw that before from them.
Great to see that the Fed is taking inflation seriously and learning from their mistake of waiting too long to raise rates. Here’s hoping they continue to let assets roll-off/expire and they only increase the balance sheet if there’s a genuine need to do so (e.g. new bank failure). Need to get back to sanity before the next crisis.
I don’t agree with your naive hope that the Fed will only bail out ( genuine ) banks that gambled and lost as a good thing. As a matter of fact, I consider the whole operation as the talisman of corruption.
Banks are not what they once were. They make their book by trading, not giving a mortgage to two young people, starting out.
They are more likely to steal their savings by enticing them to invest in an over-priced, Fed sponsored financial market.
Banks do not trade stocks at all in their own accounts and merely act as brokerages for customers when it comes to stocks.
We still haven’t seen the one thing we need to see:
what happens when markets / assets correct to reflect reality.
So far in the past, every time the Fed have caved.
That’s why we are in this mess.
They already caved with the Banking crisis.
Agreed, we saw the future in SVB.
Remember when Nobel Laureate Ben Bernanke predicted he would never again see 4% interest rates within his lifetime? And how PIMCO has paid him millions of dollars to dish out his wisdom?
Every major central bank is now above 4%. With Japan being the only exception, and it’s because they decided to let inflation rip.
Yes, their predictions of 0% forever and the new paradigm of permanently low interest rates were glorious. I kind of miss them, LOL
I kind of don’t, but I get your point Wolf
2 things I don’t understand.
1)how come market was going up for the past year while the fed was raising rates
2) why so many analysts say that yesterday was the last hike
Emil:
“why so many analysts say that yesterday was the last hike”
Wishful thinking and to continue the propaganda that feeds the casino.
Not too mention the absurdity of the whole scheme. Two pct inflation and zero pct interest rates. A negative 2 pct real rate as the goal.
Joe lunch bucket still doesn’t know what hit him. That’s the promise from big tech going forward.
Bernanke never imagined that five trillion dollars of helicopter money would actually be dropped on Main Street. Who would ever be that irresponsible?
Bernanke said you could do a helicopter drop and it wouldn’t create inflation, so long as people thought it was a one-time thing. He obviously thinks people are idiots.
They did a $5T helicopter drop, and inflation went up 20% in a heartbeat. Businesses raise prices to take advantage of the Fed’s foolish endeavors. I hope Bernanke learned something.
They’ll be back soon enough don’t worry. Sea Lance Roberts latest article on why it’s in the government’s best interest to get interest rates back down to zero.
No, they most certainly will not be back ever especially as the RISK OF DEFAULT soars across all debt classes.
No it’s not. It’s in the government’s best interest to get reelected.
The taxpayer is not the government. The taxpayer is you and me. And I benefit from the higher rates. And I loathe the excessive spending Congress/government doles out. I, taxpayer, think that high interest rates are the only discipline that can be exercised on Congress. I want long-term interest rates so high that they will force Congress to slow down its ceaseless pork-barrel spending. When the cost of capital is zero, the government/Congress doesn’t care how much free money they borrow. And they go hog-wild. And that’s what we have had for many years, except now the cost of capital is suddenly no longer zero.
The only thing that will force some discipline on Congress/government are much higher long-term interest rates.
Hasn’t Lance Roberts said for over a year that the Fed would pivot at the “next” meeting? Is that the same Lance Roberts???
“I want long-term interest rates so high that they will force Congress to slow down its ceaseless pork-barrel spending.”
About what rate do you think that would be? Double digits?
LOL, triple digits?
More seriously, last time when 50% of tax receipts went to paying interest, there was some serious discussion in Congress about it. So that’s how I would look at it, not a rate per se, but what portion of tax receipts goes to interest.
I read the post. The problem with the analysis from my perspective, and it may still be right to some degree, is the underlying assumption they (Lance’s partner Mike wrote it) expect inflation to go back to between 0 and 2%. They don’t specifically talk about inflation, but it’s a key factor in what’s sustainable going forward. They simply assume the pre-pandemic low inflation environment returns. I’m not as positive it does with the current wage and price increases.
Think about it this way. If the national debt is $30T and the inflation rate is 5%, interest rates are a little above 5%, and nominal GDP is growing 6.3% as Wolf reported today, a deficit of $1.5T (admittedly lower than the current deficit) suddenly looks sustainable because that amount is inflating away even if a big chunk of the spending is on interest expenses.
It’s interesting the post lacks a chart of interest expense as a percentage of GDP, because that is what really tells you if it’s sustainable. What the government can’t sustain is high interest rates and low for zero inflation, but that’s not what we have now and that’s not what Mike discusses as being unsustainable. Read the “Key Takeaways” from the post again: inflation considerations are curiously absent. Doesn’t inflation impact the Federal debt scheme? The numbers they present look worse than they really are because they don’t discuss how inflation also inflates GDP and tax receipts.
Lance and Mike know far more than me, but assuming inflation goes away is a pretty big assumption.
Good post regarding hindsight, Jackson Y
I wonder if, some years from now, we will be commenting here about how laughably low 5.5% (or even 6% ) fed funds rates were in 2023. 5.5%, on the way to what we’d all like to know… including Powell, I suppose.
Its revealing that the Fed has tried to distance itself (or marginalize away) from the 3rd Fed mandate: Moderate long-term interest rates.
This is from the Board of Governors website:
“The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”1 Even though the act lists three distinct goals of monetary policy, the Fed’s mandate for monetary policy is commonly known as the dual mandate. The reason is that an economy in which people who want to work either have a job or are likely to find one fairly quickly and in which the price level (meaning a broad measure of the price of goods and services purchased by consumers) is stable creates the conditions needed for interest rates to settle at moderate levels.“
https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm
short term rates not that important to market. It is central bank balance sheet. That market wants it high. That is why market wants QT to stop and start new QE.
The ECB is still below 4 percent.
Speaking of Japan – the BOJ meets today.
If Japan is indeed serious about doubling their defense spending – then I don’t see any way they can do that with their own excess savings being used to purchase our treasury debt instead of their own. Hard to see that happening while YCC is in place.
Actually the Japanese are not planning to double their defense budget over the next five years but rather to increase “national defense spending” to 2% of GDP. It is a bit of a game of semantics… the same kind that all politicians play. Lots of NATO countries are doing the same to “meet” their 2% of GDP pledge… including budget items which are not really part of their defense budget but can be called “national security-related spending” anyway. Our own interstate system was started with the “National Interstate and Defense Highways Act of 1956.”
The actual increase in the Japanese defense budget will only be about 65%… which is significant no doubt… but still is coming off of a very low base of just 5.4 trillion yen ($40 billion) per year… a number that is absurdly low for a major economic power on this planet.
https://www.brookings.edu/articles/no-japan-is-not-planning-to-double-its-defense-budget/
Is it my imagination or is the Japanese inflation rate not still the envy of the developed world?
Thanks WR for this awesome reporting as usual missed by MSM on purpose.
Yes, Powell pulled the rug yet the market still thinks he’ll turn it into a flying carpet.
Meanwhile, sofr dollar swaps market dgaf, since two weeks ago and even unch after the latest circus, fixed leg pays more than float on the dec 31st contract: 510 bps fixed, 506 bps float.
Jerome gonna have to do some more open mouth operations, almost 50bps off his mandate from heaven rates!
Mandate of Heaven rates… care to elaborate? :) I take Confucius seriously.
Not a criticism, but the mandate of heaven precedes Confucius by 750-1,000 years (+/-). Granted, he did repurpose it into a (the?) foundational tenet of his societal control system.
Powell’s mandate sources more from JP Morgan and pals, which, upon further reflection is about the same thing. Objection withdrawn.
Did he also say that there will be no rescission?
He said that the Fed mathematical model no longer considered recession as a probable outcome which leaves a model that is biased toward the optimistic, which is often only accurate after the calamity.
He said that the Fed’s staff removed its independent forecast of a recession THIS YEAR. And I agree with that. It’s hard to imagine how we’re going to get a recession the second half.
I agree. But.
GDP print for Q2 came in at 2.4% vs 2.0% estimate. Haven’t looked at the data exhaustively – but it looked like the beat was largely-influenced by an improvement in the inventory performance. We know that varies a lot from quarter-to-quarter.
I think there’s a pretty good chance of a negative GDP figure for Q4.
A big increase in the WCI-SHA-LCX costs in the last month suggests to me that trade will become an increased drag on GDP later in the year. And if oil prices DO go up – the admin might have to wait until early-Spring 2023 to drain the rest of the SPR in order to get any useful boost for the election
“Whether the Fed raises interest rates further or not, borrowing costs are the highest in years,” “Between a robust job market and the rate of inflation more than double the 2 percent target, the recent economic data makes one thing clear — the Fed is nowhere close to cutting interest rates.” I’m going back into the foxhole until 2025, regardless of who wins the election QT will continue slowly and methodically. Liquidating assets sooner than later is the slippery slope. VIX has not been this low since before COVID, S&P could break 4800 next week. Wall St. Is still the greatest show on earth. There is no stopping this BULL market.
Last one out the door ,turn off the lights
It was telling that Powell passed on the chance to toss a little cold water on reheating asset prices. For most of last year he spoke regularly about the importance of tightening “financial conditions”, often appearing to actively want to keep a lid on markets.
Now the dollar is weakening against most other things in real time markets including foreign currencies, stocks, bonds and commodities, a prelude to it weakening against consumer goods and services. The thing the markets may have least priced in would be that yoy CPI begins to rise again from here.
There could be serious exchange rate problems ahead. How many other major governments are forecasting deficits equal to 6%-8% of GDP, as far as the eye can see?
The US is becoming a standout, but not in a good way.
China, Japan, and the UK all have budget deficits in that range. But with obvious key differences:
– China’s domestic savings rate can swallow that up with no issue whatsoever.
– Japan’s domestic savings rate can *just about* do it. But if they double defense spending – there will be a problem.
– The UK has nowhere near the domestic savings rate to handle it. And it produces very little that the rest of the world wants. Without Germany being in a position to bail them out they are not even the next Greece. They are the next Lebanon.
Powell works for the wealthy.
Why do you think he’d put cold water on over heated asset prices.
He is doing exactly what he is supposed to do ie help his rich friends.
The biggest loser are the working and poor class with no assets.
If Fed was really serious about bringing down wealth effecf and trample down inflation then they would have hiked by 50bps and surprise the market.
Powell would do what the market expects him to do and he does exactly that.
Article in WSJ today says Wall Street is convinced the Fed is done raising rates and that rate cuts are coming. That explains the current behavior of the stock market and the strongly inverted yield curve. Six per cent might be the magic number that breaks the spell, but Wall Street believes that the Fed doesn’t want to break the spell. Nobody wants 100 demonstrators on their front lawn chanting and ringing cowbells at 2:00 am.
“…says Wall Street is convinced the Fed is done raising rates and that rate cuts are coming.”
Yes, Wall Street has been wrongly convinced of that for a year.
I still don’t understand how raising rates is meant to stop inflation?
Rates rise and companies raise prices. Inflationary.
Prices rise, workers demand higher wages? Inflationary.
billions in new CD and treasury interest looking to be spent. Inflationary.
??
Higher cost of capital slows borrowing, which slows investment and consumption… so less hiring and more unemployment … with less demand and buying pressure in the economy, companies compete on price to hang on to sales, and inflation dies. That’s the theory. It usually works, if you go far enough.
So the Fed’s strategy is to raise rates and “break something,” but “just a little?”
That’s a might tight corner to have painted itself into…
I don’t see it happening either. If you can have 15 years of extraordinary easy money and then have the Fed soft land the plane then mankind should have figured this out a long time ago.
The truth with financial markets is they cannot be predicted as there are surprises. There is a limit to growing debt faster than GDP. If we are going to stop doing that, then nothing is priced correctly. If we are going to keep the debt growth going then interest rates will have to be negative in real terms.
John H.,
No, the Fed ALREADY broke something, and it is HUGE what it broke: price stability.
So now it has to fix what it already broke.
The easy money folks think they have an ace in the hole. They can simply print money to create elevated inflation, which reduces debts. Logically, it can work for a long time, it seems. In theory, each time they do it, prices simply adjust higher and the economy eventually stabilizes at higher price levels.
The first phase of their money printing experiment went very well. After the Great Recession, they printed $4T over a decade, asset prices rose, inflation stayed low, and the economy was put into a Goldilocks state. Asset values grew 300% in a decade, which made the decision-makers very happy. The Fed still talks about how strong the 2019 economy was. The only problem was that debts did not recede. They grew. But they successfully kicked the can down the road.
The second money printing experiment happened during the pandemic, and it went pretty well too. They created a quick 20% inflationary price step-up to erode debts, and long term interest rates didn’t rise that much. Some crazy people who bought bonds paying zero rates were taken behind the woodshed, but the larger bondholder population obviously views that as an anomaly. Long term rates are still only 4% on a 30-year, implying low inflation expectations in the future.
When the next manifestation of the debt crisis appears, let’s see if the Fed starts its QE money printing program again. The government is teeing it up the money printing with recurring deficits in the $2T to $3T range, or 6%-8% of GDP. On both sides of the isle, there is little inclination to reduce deficits, because they assume the Fed will simply monetize debts, as in the past.
They monetized once with zero difficulty. They monetized a second time with only modest push back. Will it work a third time? Is the Fed crazy enough to try it? That’s not a bet I’m willing to take.
If they restart QE, or even reduce the QT program, a huge portion of my wealth will be converted out of dollars. As it stands now, based on past instances of money printing, I will never hold a long-term bond denominated in dollars.
Wolf- “ So now it has to fix what it already broke.”
That sort of reminds me of the Dr. Seuss Cat In The Hat Comes Back schtick where each successive attempt to clean up the pink ring in the bathtub leads to a larger mess.
The book has a mysterious magical happy ending, in case you haven’t read it! Wonder what an analog to “voom” might be…
(You might guess that I read to the grandkids!)
The trick is not to have the increased cost of investment sandbag the growth of the real economy.
Cost of capital is still a higher cost and that is inflationary in its own right.
I enjoy being able to deal with a bank and get something more valuable than a lollipop for my troubles…but whether the reduction in inflation we’ve seen in the past 12 months is due to the Fed’s action or a pullback in energy prices due to a variety of reasons – I don’t know.
IMO – the writer here has got it right. Much of the cause of our latest bout of inflation was the result of too much transfer payments meeting supply-side constraints.
And raising interest rates is not really going to have much positive effect on removing supply side constraints.
I removed the link.
” the writer here has got it right. Much of the cause of our latest bout of inflation was the result of too much transfer payments meeting supply-side constraints.”
That was the case in 2021 and early 2022. Then inflation shifted to services — you need to start paying attention here, we’ve been discussing this for over year, with charts and all — and supply side constraints didn’t impact services. Two-thirds of consumer spending goes to services, and that’s where inflation has been for over a year. Goods inflation has abated. Bloggers who now still blame supply-side constraints are morons.
Morons, or just dishonest? If they maintain the “supply chains” trope, then they can dishonestly argue that money printing and ZIRP wasn’t a major cause of the inflation, and argue for it to be brought back.
Yeah, but what is far enough? Every time I go to the store the prices have increased on some items. That’s not changing. Rent increases aren’t halting. Wages can’t decrease because older workers are retiring and there’s fewer people in the population to replace them; which means wages will have to remain solid to attract workers. Even in a slow down, government unemployment insurance and low income subsidies will keep inflation going with money spending. Lastly there is a LOT of money with no place to go…which is why prices won’t come down except in certain specific areas like office real estate in some cities. Gas in Calif. still hovers around $5.00 a gal and that’s with Biden emptying the oil reserves to keep prices down. I, and every one I know continuously buys extra food that has a long shelf life because it’s certain prices will increase next trip. Products get more flimsy and still increase in price. Shrink-flation is in full swing. Nobody believes “real” inflation is going to significantly come down from here on out due to environmental factors, aging populations, and increasing energy cost with lower easily gotten reserves; and there’s tons of currency floating around waiting to snap up anything of real value. Numbers may bounce around but overall inflation is here to stay for decades; just the way zero interest rates for savers were the norm for many years…inflation will become the norm for a similar number of years.
To be fair, wasn’t there slow investment during the QE low interest rate era ? Instead of putting money into expanding research and production, corporations put money in stock buybacks and dividends, leveraged buy-outs ? Aren’t these things more common in a low interest rate environment ?
I wonder with higher interest rates, companies are forced to start investing in research and production to actually be profitable in a different form ?
In my opinion, Jerome Powell seemed to be afraid about the extent of the Federal Reserve’s complicity in creating an over priced asset market designed to entrap young people trying to establish a family.
He addressed neither issue other than the perfunctory manner that the elite use to dismiss the less than.
It can’t be helped.
Powel is so full of s*** everyone should be embarrassed financial conditions are looser now than even before they started raising rates! The only positive is that my house is now worth triple what I paid in 2018.
Bank credit is getting much tighter. And has been for a year. That’s a big thing. Junk bonds are still loosey-goosey though. But that’s markets fighting the Fed. It’s these morons that run around saying the Fed is going to pivot any day, the Fed isn’t serious, the Fed will do QE again tomorrow etc. If markets fight the Fed, the whole thing will take a lot longer, with rates going a lot higher, and staying higher a lot longer. Markets are the stupidest thing out there. Half of the market is by definition always wrong.
Wolf, if you have the opportunity to answer my question, I will be very grateful.
In Bulgaria (Eastern Europe), where I currently live, we are witnessing an anomaly.
The government borrows at 4.75 percent, and the central bank raised commercial banks’ minimum reserves to 13 percent.
However, mortgages here are the cheapest in Europe and cheaper than anywhere else, and people are borrowing like crazy.
All take out mortgages at a variable rate of 2.65 per cent and a 3-year fixed rate of 3.99 per cent.
Economists say this is because banks are flooded with money from deposits.
Yet there is no logic in a small economy lending more cheaply than the US, Germany and other large economies and at the same time to take a loan twice as expensive.
Do you have an answer for this case study?
WR, I think you are spot on regarding the Fed.
And here we are this morning with markets screaming higher on the presumption that this was (another) dovish Fed meeting result.
Since Jay Powell appears forthright in his conviction, it looks like higher for longer ( for now).
Wolf I hope youre right and that QE stays on the shelf forever going forward. I worry the next fed chair will be tempted to return to ZIRP and QE during the next crisis and we have another 14 years of this mess pumping wealth to the top. I think pressure from the wealthy to do it all again will be intense once inflation is finally actually squashed. If theyre under the impression they can play the game again and get another 14 year run before someone else has to clean the mess they may think “not my problem”. Heres to hoping saner hearts and minds prevail.
Markets was wrong but made a lot of money this year. Meta, Nvidia, Microsoft, all up from 50 to 150% just in one year. And it doesn’t seem it wants to stop
Yes, we need to go back to the truly free markets before the Fed, FDA, etc. Back when true Capitalism ruled and I could sell you stock in prime Florida swampland with no oversight. Even my shoeshine boy through he’d be rich.
Then I can sell you a magic elixir containing opium to cure all of your problems. If that doesn’t solve your problems, then my other elixir containing alcohol will do it.
That was when you could make good money legally.
Long live True Capitalism!
/sarc
IMHO, the Fed has overstepped its bounds and got us into this mess. They ran the economy like any fascist or communist Central Planning Committee. Given the results, you could call it Crony Capitalism, Corporatism, or an Oligarchy since communism and fascism are bad words.
As long as we wait with bated breath for Powell’s and the Fed’s next words like they are god’s gift, we are in trouble.
its BECAUSE OF the fed, that your house is worth ‘triple’ now…
so why are you badmouthing the head honcho thereof?
seems like you have a case of the contradictions, hmm..
A guy at work called me Dougyfresh. I think we all under estimate how far behind the curve Powell was. He just crossed the line to where money was restrictive about 4 months ago.
Stock market can be pretty smart and is still dancing even though its still in 90% plus percentile on a lot of metrics. Bernanke implementing wealth affect policies means stock market is mostly gambling on policy, but if Powell is undoing that then it would seem current valuations must come back to long term mean at least.
What are central bankers anyway? Aren’t they just specialists at trying to run the fractional banking system as fast as possible with a money printer backstop?
The short-term interest may be touching restrictive territory, but not the long-term interest rate.
The long terms rates near 4% on the 10-year and 30 year are certainly not restrictive, if the Fed’s long run inflation target of 2% is believable.
Most important business decisions are based on the long-term interest rate and long-term inflation expectation.
He sounded like he has no clue what will happen. That is the only explanation for leaving every possibility open. When you commit to nothing, predict nothing, you cannot be wrong.
You don’t get it. Try again.
I said a while back that 5.5% wouldn’t stop this stock market, and now we’re talking about 6% as maybe the top in rates. Again, the big money in this stock market is laughing at these low rates (earned if they leave their money in T-Bills or whatever for a full year).
The more the big market cap tech stocks rise, the more these traders see confirmation in their buying efforts. Even 6% for a year is nothing compared to what this big money is earning in merely months (or even weeks)…
I don’t think we’re close to the top in rates, remembering that Volcker had to raise short rates way into the double digits to stop inflation back in the early ’80s.
There is, quite simply, WAY too much money still sloshing around the economy. Too many cashed up speculators playing fast and loose. This free money has legs, will travel.
As the extra $5T in printed money passes from one to person to another, in a series of product and services transactions, a share of it lands in the hands of the top 1%, where it leaves the real economy. The fat cats simply pass the money back and forth in exchange for passive investments. Inflation might subside, but if the Fed doesn’t take that printed money out of the system by selling more of its balance sheet, passive asset prices are going to rise another 50% in a big hurry and super charge the already high wealth concentration we are seeing.
The Fed never gave a hoot about high asset prices and wealth concentration. It denies all responsibility for it. Even now, the Fed seems oblivious to the consequences of its own actions.
I agree that they don’t care about high asset prices so long as CPI appears low. The problem with this thesis, in my opinion, is that high asset prices are high CPI inflation are inextricably linked. They just show up at different times.
Here’s a few examples.
– Wealthy people, emboldened by their stock gains, overpay for new luxury cars. Car manufacturers, seeing that, shift their production to that end of the market, driving up new car prices in general.
– Wealthy people, emboldened by their stock gains, buy additional real estate and leave it empty as a second (or third) house. That then removes a house from the “available to live in” market, driving up prices and rents (indirectly).
The point is, when the Fed started printing in 2009 and driving up asset prices, it was only a matter of time before that printed money manifested itself in other areas. Many economists wrote about this at the time.
Until they knock asset prices down, and keep them down, “normal” inflation will continue getting worse.
I think it’s wrong to say that that money is leaving the real economy when the 1% is buying up housing stock and converting them to rentals as inflation hedges. With obvious inflationary consequences to the rest of us.
Selling those assets more quickly would rapidly become tantamount to trying to walk a tightrope while juggling molotov cocktails.
Fall off the wire – and we go straight back to QE.
All that money has limited choices of investments.
Real Estate, Stocks, collectables.
Collectables? Are Beanie Babies and Furbies making a comeback?
It appears anything to do with AI is the latest bubble stampede with all of that extra cash.
Sigh…. I missed out again.
5.5% TBills for me.
I just want to point out the obvious, that buying stocks that go up is not “earning” anything unless they cash out, and very few are. The reason stocks go up relentlessly is that there is no selling pressure, and only buyers. Well, that means that if any appreciable portion tried to sell to “lock in gains,” prices would drop. It’s a paradox that most people can’t grasp.
Einhal-
“The reason stocks go up relentlessly is no selling pressure, and only buyers.”
To say that there are no sellers is in error.
Every buyer buys from a seller — ownership changes, and prices, are determined at the margin.
It is unfortunate, though, that federal intervention into the interest rate markets has encouraged the public’s desire to own financial assets and real estate, while simultaneously that same intervention has discouraged government avoidance of deficits/debt.
The cycle of rate manipulation continues and expands…
Obviously there are not “no” sellers, but the point is that prices continue increasing because the pool of potential “sellers” are not willing to sell except at very high prices, and the pool of buyers will buy at basically any price. If many holders of assets decided “Time to cash out,” and they all sold at the same time, prices would plummet.
The turn in the stock markets will come when corporations themselves, not start-ups, become net equity sellers. For almost 15 years now, ridiculously low rates have given corporations incentives to issue long-term debt and buy up existing stock along with plowing profits also into buying up existing equity. That process has to reverse at some point, doesn’t it?
Yancey, yes. The only companies that will be able to do stock buybacks in this environment are ones that are actually generating tons of free cash. The days of zombies doing so with borrowed money are over.
@Einhal,
You’re very wrong.
One of my college classmates *was* a CEO at an S&P 500 company from 2014-2019. At our 25th reunion he told me the following:
“Planning a stock buyback receives the same level of serious attention that village elders would give to the demands of war lord’s demand for tribute in 10th century Mongolia”.
And he was stark, raving sober at the time (Note: I wasn’t!)
He then went on to say that if you can’t directly debt-finance an open market repurchase – you *have* to do a convertible offering to secure the funds. NOT doing the buyback is just not an option for a company with significant institutional investment. The leadership team would be rolled if it entertained such an idea.
BigAI, that was a very different time. Ultimately, they need to get money to do buybacks. If they aren’t earning it organically, they have to finance it. Regardless of the structure and source of financing (whether commercial paper, two year notes, convertible preferreds, or anything else), you have to find someone willing to lend you the money.
“I don’t think we’re close to the top in rates, remembering that Volcker had to raise short rates way into the double digits ”
20% Fed Funds rate, 21.5% Prime rate in 1982
Look at the inflation at that time. It was really bad. I lived through it. No comparison to today.
The inflation episode at the time lasted over two decades.
The oil price also increased about fivefold between 1970 and 1982, a serious supply side input shock, especially in an America that was far more industrialized than it is today.
You will know we are at the top when I capitulate and buy stocks because making money in the stock market is so easy even at all time highs. No need at buying SP500 at 670 when you can buy it at 5000.
I bought a little when S&P was at 3,850 or so (late last year), but with t-bills at 5.5%, I wouldn’t buy anything at 4,000, and certainly wouldn’t buy anything at 4,600…
I buy programmatically annually on behalf of my children, but gave up waiting for a deeper correction into which to deploy a lump sum I got back in summer of 2021. I split most of that into one of the Canadian telco oligopolists and a cash etf (based on Canadian bank high interest savings accounts) about a month ago, so my overall position is down to 13% cash, giving me some dry powder, but I’m not holding my breath.
I worked really hard to get my lifestyle and assets in a good spot where all I need is to keep up with inflation. My taxes should stay in the lower brackets much tax free.
If stock market really craps out and goes sub 2000 I will probably go all in, in my Roth account and hope I can leave a home run for my kids. In my tax deferred accounts I don’t need to risk it as government is going to get a big bite if I hit a home run. Why risk it just to give 40% of the gains up if you are successful?
I noticed that the mix here is a bit different than other sites. Most likely Wolf keeps the sheep
and their baa-baa bad news at bay with data, logic, and wisdom.
1/3 appear to be retired folks giving historical perspectives, 1/3 appear to be seriously angry
people mad at the elites for their ills and poor life choices, and 1/3 appear to be folks trying
to figure stuff out. Occasionally, you have folks who are willing to share their area of
expertise and wisdom. Those are the nuggets that I like to hear. Thank you.
Only thing I can add is that I heard what Wolf said about golden handcuffs
of the 3% mortgage from two different long time brokers and higher interest rates, just
recently. Life changes houses such as death, divorce, job loss, retirement, etc are the ones
popping up on market. Not all, but many. Part-timers or soccer mom real estate folks
are going to need to find a new career because they will not be able to compete against
these barracuda old timers. Oh, this is on the left coast very expensive tech city.
I think anyone with a 3% or less mortgage on their home has a real gift and they should do everything they can to keep it even if they have to turn it into a rental if life forces them to move.
Have you ever been a landlord? Here’s a hint. It sucks.
Thanks. Just sold M-in-law’s home after debating with a relative about renting her place (market slow, we could avoid capital gain if we sell after she passes, etc.) I just did not want to try to learn how to be a landlord at this point (and I don’t need to).
@old school,
Yes – with the caveat that the tax burden could rise substantially.
Over the past half-century sources of municipal receipts other than property tax (or their mutant offspring – c.f. “sewer taxes”) have more or less vanished.
1/3 appear to be retired folks giving historical perspectives,
*These folks have hopefully obtained wisdom.
1/3 appear to be seriously angry
people mad at the elites for their ills and poor life choices,
*These folks should have obtained wisdom but have not.
and 1/3 appear to be folks trying to figure stuff out.
*These folks are searching for wisdom to obtain.
Occasionally, you have folks who are willing to share their area of
expertise and wisdom.
*See above about who has obtained wisdom.
Those are the nuggets that I like to hear. Thank you.
“I think it’s possible that we would move at consecutive meetings. We’re not taking that off the table. Or we might not. It really depends on what the data tells us.”
He knows that inflation is probably going to accelerate because the healthcare adjustment and declining energy prices are played out. This ain’t over.
DC
I noticed gas stations around here are raising prices by 30 cents or more in the last week alone. Crude is hitting $80/barrel. Could it be that inflation is accelerating again?
I noticed that the draw-down in the Strategic Petroleum Reserves stopped in the last week or so.
And it’s been quiet – hasn’t it?
No wild predictions of $1500200/barrel oil this time around that I’ve read.
Right now there’s a strange feeling of “The Fed has beaten inflation without causing a recession or a stock market crash. So my income is safe and I can spend more” amongst consumers.
Seems like consumers are in the pink no matter what they proclaim on Twitter:
No worries about inflation!!! Heck, the fed gvt will dump 5 trillion $$$ of new debt $$$ into the economy over the next few years!
The wheels on the bus go round round round until they fall off!
To the wolfstreet.com owner, Thanks for the well-presented post!
“Rate cuts while QT continues “could happen”: ”
My bet is we will see a pause…..with QT continuing and having a measured impact on longer rates…flattening the curve
all the while as the Treasury has record auctions
but I have little faith that there will ever be a “7” infront of the balance sheet again
Agreed. At the current rates, it’ll take 4 months of runoff before there’s a 7 in front. I think something breaks before then that requires a new facility of some sorts.
If the Fed manages to pare even $1T off the balance sheet before something goes haywire, I will celebrate by buying Wolf a beer.
I agree with your assessment.
You’re too pessimistic
What about when it reaches $70 Trillion?
Check back in November.
Just wanted to say how much I appreciate Mr. Richter’s efforts and the eclectic, thoughtful comments. I’m unemployed but once I have my CC debt paid off (soon!), I’m making a donation. Fortunately wife and I saved 1.7M for retirement via almost no vacations,10 year-old cars, and lots of home cooking, mowing my lawn, doing minor home repairs, neglecting upgrades. If they try to means test us out of SS benefits in the future after all this sacrifice I’ll blow my stack!
Thanks… but if you have $1.7 million “saved,” why on earth do you have credit card debt? That’s the most expensive debt there is. If you pay 20% interest on your credit card debt, and you pay off that debt, it’s like investing in something risk-free that pays 20% tax-exempt interest! Best deal in the world!
Wolf, Absolutely!!! I have no where near that level of savings but then no debt either. The 2 credit cards I have are for their ease of use for online, or point of purchase only (vs cash or checks) and paid off before interest is charged. My last balance was near $4,700 and the statement said the minimum payment was about $43! Reminiscent of loan sharks, remember when that was illegal? :-) I was blessed somewhere along the line years before retirement, with the idea/worry to start putting money away and paying off all debt. Thank God for that simple idea.
I have long made that same argument (applied to all forms of debt).
I’ll guess hardbitten has been maxing out IRA/401k/Roth, etc., no matter what, good employer matching, all in equities, had some nice market move along the way, etc. It’s plausible for a professional couple in their 50s.
It appears anything to do with AI is the latest bubble stampede with all of that extra cash.
Sigh…. I missed out again.
5.5% TBills for me.
Something weird happened with my post above. It went to 2 places. Sorry.
I respect Dave Ramsey’s advice on debt. He says not to have any that requires paying interest (Except for a 15 year mortgage on a house). The goal is to pay off ALL debt before investing.
I don’t agree with him that a 3% mortgage should be paid off before investing in a 5.5% TBill. As long as that TBill isn’t spent on something else before paying off the mortgage.
hardbitten,
I watched some really good videos on retirement planning. The tax code in retirement had gotten very harsh when you start placing taxes on top of each other. Social security is already taxed partially for some and creates a bump in marginal tax rates and rates are scheduled to go higher in 3 years. I think in some states the marginal rate during the bump is about 50%.
Its gotten so bad that you really need to start using software to start doing retirement tax planning around 50 or 55. I see more of this coming and its a competition between the government trying to scramble to get more income and individuals using all tools to try to escape them.
Real power is the power to spend. If government spends it, then its got to be paid for thru taxes or inflation.
The central bank chooses the stable base rate, its like a balance. You could pick a stable base rate of 5%, then ease and tighten appropriately until that becomes accepted. Or 1%.
For various reasons, the main being inflated asset values, they have collectively chosen very low rates so I believe that their target is to establish low base rates again. Whether the base rate being maintained at 1% is better than at 5% is moot.
A few years down the road this is what the goal is. So i don’t think they will ease off until they have the direction going down.
Don Quixote Powell tilting at the IRA. IIJA, Chips act and Billions in unspent Covid monies with $60B in QT and .25 point rate hikes.
SMH at this. But making money every day so let’s go.
The COVID monies are long since spent. Even the State aid given to local towns and cities is pretty much at an end.
covidmoneytracker (dot) org
pgpf (dot) org
Billions unspent Al.
Another “Pause hikes or the parade of horribles will occur” article from the parasites in Congress (with a D next to their name). Search for this article:
“The Fed has a habit of over-correcting — pause the rate hikes, protect workers”
If that article is proposing to reduce interest rates, while accelerating the pace of QT, maybe its not a bad idea. It’s the QE that heavily distorted the economy by skewing prices of duration assets. For example, the Fed’s purchase of MBS allowed people to lock into 2.5% 30-years loans, which is a force that supports artificially elevated home prices.
The sooner the Fed reduces its balance sheet, the sooner the economy will normalize.
As I’ve said – I don’t think the Fed will back off on tightening to boost asset prices or even avoid a recession.
But I *do* think the tightening grinds to a halt if there’s a need for a sweeping bank bailout program (could happen as a result of CREs), a major credit market crackup (c.f. 2019 Repo Crisis) or some crazy force majeure think happens that requires the Treasury to suddenly issue lots of new debt.
And I do think there’s a limit on how fast they can tighten because the US can’t run over its NATO allies with a stronger USD that exports inflation to them. Right now the chances of this would seem to be diminished because the Fed has moved to a “wait & see” approach while the ECB is still steadily tightening.
Won’t mention my source…(rhymes with Hero Ledge) but Jobless claims are lowest in 5 months.
From the article: “Does any of this smell like The Fed’s 500bps of hikes had any impact at all?”
According to the latest statistics the fed is a complete joke.
Government cash is swamping the economy. The feds silly 5 and a quarter is doing nothing as cash is being printed into the wazoo.
Stock market exploding since the economy is exploding.
Frankly we are experiencing the first us economy that is more government than private so all bets are off. Capitalism is somewhat dead and the planned economies of the USSR of the 50’s is now us. Hope it turns out better.
There is no ‘cash being printed’ at all these days. The government spending comes only because of $2 trillion of annual deficits which is further severely damaging the fundamental future outlook for the US economy and will require ever more interest payments and restrictions on spending in the future. As to the stock markets, they are broadly down with the exception of the very few stocks on the indices.
We are in a housing and stock bubble. People get foolish at the end and make bad choices assuming the trend will keep going up and to the right. Bubbles blowing and bursting is a fact of life.
Wolf, thank you very much for breaking all of this down as you do. There’s so much in the news today about “read between the lines and you’ll hear Powell admitted they’re done hiking”. What you did here presenting it all in context makes such a big difference.
Thanks again Wolf!!!
You are an educator. I have been on many investing and trading forums but this is more like an economist forum and some are not amateurs. It has a high level of decorum because you work hard at keeping our heads on straight. I hope you are getting what you need out of this!
I give what I can to this ‘economist forum’. GDP up big today. Governments that can are spending big on green industry.
So again, to all of my ‘economist’ friends, from my trading point of view now is the time to buy the companies that supply the things that are needed to build and supply the factories that will help moderate climate change and aid in the building out the second and third worlds to improve equality.
2 things I don’t understand.
1)how come market was going up for the past year while the fed was raising rates
2) why so many analysts say that yesterday was the last hike
The trend is your friend….
Vs.
Don’t fight the Fed.
With strong employment, there is probably a lot of automatic stock purchases by institutions…401k….
But in my opinion higher interest rates seems to produce a crash at some time.
I think I can answer number 1. Money really wasn’t restrictive til 3 or 4 months ago. People know you can make some of your best returns at the end of the cycle if you are willing to risk getting crushed by the steam roller.
Pretty good news today:
Second-quarter GDP increases at 2.4% rate
Consumer spending slows, but pace still strong
Business investment picks up on equipment rebound
Weekly jobless claims fall 7,000 to 221,000
Retail might have some headwinds. Inventory is too high.
META and GOOG had great earnings. They do not make anything that helps the economy’s productivity output such as building infrastructure like roads, buildings, manufacturing, tools. They sell ads when people look at their content. They are selling a lot of ads and that means the consumer is still spending as advertisers are still buying ad spots.
But it also means that inflation will not come down. They’re not going to get the soft landing they wanted.
Wolf,
Many thanks for the concise synopsis. Excellent work.
Had to chuckle at Powell’s comment that the FOMC doesn’t expect inflation to come down to 2% until 2025. Unlikely to hit 2% the rest of the decade, apart from emergency action. Perhaps Bernanke might want to say now that we won’t see 2% inflation again in his lifetime?
To be fair when Bernanke and Yellen say they wont see things for the rest of their lives they are banking on the fact they are geriatrics.
GDP grew at 2.4% (annualized) rate in Q2.
Long yields back above 4%.
Jobless claims dropping.
At this rate there’s at least a slim possibility of no rate cuts in 2024, right? The market is pricing in FIVE net 0.25% cuts, taking federal funds rates down to 4%.
The “market” was also pricing in cuts in mid-2023 (that is, now) at one point. The whole thing seems less like a legitimate market, and more like a thinly veiled pump and dump.
Howdy Jackson. Mr Wolf taught me about the fed dot plots. The FED seems to be following their own dot plot fairly close. The long or short about Wallstreet??? Who knows???
Wow really crazy shit from Powell. Is he really oblivious or does he have more understanding than he lets on and is really more concerned with crushing wages than with managing the already passed inflationary wave?
Wolf — This is inflation raised to the power of social media. Social media arrived years after the last bout of significant inflation, and to the degree that inflation has a psychological or groupthink component, social media has broadcast and amplified it, creating a new set of dynamics for which we have no precedent. Everybody “knows” that everybody knows there is inflation in various sectors of the economy, etc.
Just a hypothesis, but if correct, this inflation will remain sticky and difficult to reverse.
I appreciate the articles and intelligent commenters. Thanks!!
When interest payments were 50% of tax receipts in the 1980s…
…upper tax rates were 70% !!!