Higher for longer becomes formalized one meeting at a time, as projections for “longer-run” federal funds rate keep getting raised.
By Wolf Richter for WOLF STREET.
FOMC members voted unanimously today to maintain the Fed’s policy rates unchanged, as Fed governors have uniformly telegraphed in their speeches:
- Federal funds rate target range: 5.25% – 5.5%.
- Interest it pays the banks on reserves: 5.4%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 5.3%.
- Interest it charges on overnight Repos: 5.5%.
- Primary credit rate: 5.5% (banks’ costs to borrow at the “Discount Window”).
To douse Rate-Cut Mania, starting at the January meeting, the Fed had added new language to its statement. At today’s meeting, it repeated that language for the fourth time:
“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
And it repeated what it had said since the rate hikes started: “The Committee is strongly committed to returning inflation to its 2 percent objective” – with which the Fed whacks back at folks that are pushing it to raise its inflation target to 4% or whatever.
The FOMC statement maintained the new language on the labor market being in “better balance” that it had introduced in May:
“The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.”
The “dot plot,” Oh MY! Rate Cuts dialed down to just 1 cut in 2024.
In its updated “Summary of Economic Projections” (SEP) today, which includes the infamous “dot plot,” each of the FOMC’s 19 participants jots down where they see various economic metrics – the Fed’s policy rates, unemployment rates, GDP growth, PCE inflation, etc. – by the end of 2024, by the end of 2025, etc. The median value of these projections (the value in the middle) becomes the headline projection for that metric. These median projections are not a decision by the Fed, nor a commitment. They’re a summary of how the 19 participants are seeing the economy evolve.
The median projection for the federal funds rate at the end of 2024 was 5.125%: only 1 rate cut of 25 basis points in 2024 — down from the three cuts envisioned since the December meeting — bringing the Fed’s target to a range between 5.0% and 5.25%.
Four of the 19 participants saw no rate cuts in 2024, seven saw 1 rate cut, and 8 saw 2 cuts. None (zero) of the 19 participants saw 3 cuts or more in 2024. This is a hawkish dial-down from the last dot plot in March, when 10 participants saw 3 or more cuts.
The mid-point has been 5.375% since the July 2023 meeting. Here is how the 19 participants saw the rate scenario for 2024:
4 see 5.375%: No cuts (up from 2 participants in March)
7 see 5.125%: 1 cut (up from 2 participants in March)
8 see 4.875%: 2 cuts (up from 5 in March)
0 see 4.625%: 3 cuts (down from 9 in March)
0 see 4.375%: 4 cuts (down from 1 in March).
Higher-for-longer: The median projection for the “longer-run” federal funds rate rose to 2.8% from 2.6% in the March SEP, slowly but steadily advancing with every meeting along the higher-for-longer theme.
GDP growth projections: The median projection for GDP growth for 2024 remained at 2.1% (from 2.1% in the March SEP, and from 1.4% in the December SEP).
Higher inflation projections: The median projection for “core PCE” inflation by the end of 2024 rose to 2.8% (from 2.6% in March and from 2.4% in December).
Unemployment rate projections: The median projection for the unemployment rate remained at 4.0% by the end of 2024.
QT continues at the slower pace announced in May, to avoid the kind of mess the Fed experienced with the repo market blowout in September 2019 after QT-1. “By going slower, you can get farther,” Powell had said at the press conference after the last meeting. The Fed has already shed over $1.7 trillion in assets since it started QT in July 2022. It will continue to shed assets but at a slower pace.
The slower pace of QT starts this month. The Treasury roll-off was reduced from $60 billion a month to $25 billion. On the other hand, the Fed removed the $35-billion cap from the MBS roll-off.
MBS come off the balance sheet via passthrough principal payments that result from mortgage payoffs, but mortgage payoffs have collapsed as refis have collapsed and homes sales have plunged, and these passthrough principal payments have become a trickle of around $17 billion a month. If the mortgage business ever picks up again so that more than $35 billion a month in MBS come off, these MBS will just come, and goodbye, but the excess over $35 billion will be replaced with Treasury securities.
Here is the whole statement:
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.
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Howdy Youngins. Don t forget, higher for longer is also.
Normal for longer. You were ZIRPed to stupidity and locked into your own homes. Good Luck.
High rates don’t so much lock people into their old homes as lock them out of new ones.
Punishing interest rates can exert a detrimental psychological effect, but if viewed rationally, they shouldn’t always push someone into staying in the same place.
The goal of life is progress; sometimes you take one step back to take two steps forward.
The current rates are anything but “punishing.” They are normal, and quite mild as compared to the high rates of the 70s.
Exactly, DC.
I understand how the current economic situation can improve so that the Fed COULD cut rates. What I don’t understand is why the WOULD. Why further stimulate an already health economy?
High *prices* lock people out of new ones. These “high” rates wouldn’t be a problem if prices even approached sanity.
Exactly, thank you. Lots of boomers here saying rates aren’t high relative to the 70’s without acknowleding that an average home in 1970 cost $17,000 (~$65k today inflation adjusted).
High rates + inflated asset prices = priced out youth.
So prices have to come down, they’re the problem. It’s not rocket science.
I saw a snippet of Powell’s speech on CNBC. I did not see the entire speech. In the snippet, Powell said there is a SUPPLY PROBLEM in housing, as there was before the pandemic. He said nothing about housing prices.
He said the best thing for the housing market is for inflation and interest rates to come down. He didn’t say anything about the need for housing prices coming down.
This is why I question the thinking and fortitude of Powell and the Fed. They don’t recognize the damage done by continually escalating asset prices until their eyebrows are burned off from the explosion.
Bobber,
“He didn’t say anything about the need for housing prices coming down.”
He could NEVER say that. That’s forbidden language. He can NEVER say that asset prices in general need to come down, and that the Fed will try to push them down. But they’re pushing them down by raising rates, and everyone knows that, it has just spread unevenly among asset prices so far. Commercial Real Estate values have already been crushed by it. Banks have been crushed by it, several imploded and took their investors down with them. Long-term bond prices have been crushed by it. The Fed has caused trillions of dollars in loss of asset values across these sectors.
However, high housing prices are a topic of concern in the Fed’s Financial Stability Report that comes out twice a year. And even there, they tread carefully, and Powell never mentions the Financial Stability Report.
https://www.federalreserve.gov/publications/files/financial-stability-report-20240419.pdf
“A model of house price valuation based on prices relative to market rents and the real 10-year Treasury yield suggests that valuations in housing markets were increasingly stretched. Moreover, an alternative measure of valuation pressures (which uses owners’ equivalent rent instead of market rents and, therefore, has a longer history) also suggested elevated valuations (figure 1.18). Moreover, the median price-to-rent ratio measured across a wide distribution of geographic areas remained close to its previous peak in the mid-2000s (figure 1.19). That said, credit conditions for borrowers remained tighter relative to the early 2000s, suggesting that weak credit standards are not driving house price growth.”
More like low rates lock them into their old home. We don’t really have “high” rates.
Lower rates lock people into their existing homes!
Anybody who calls me a “Youngin”… Is a friend of mine!
:-)
Too many people on this blog struggle with what has to happen to maintain traditional home ownership rates when housing, insurance, education, food and transportation costs have exceeded wage growth for long periods over several decades. Prices will have to adjust downward.
Feel free to lament the era when people didn’t spend large sums on phones, computers, and whatever else we might deplore. The reality is that for many the current cost of housing is unattainable.
My parents made $7/ hour (combined)
In the 70s and paid $11,000 for a
home that now costs nearly $280,000. My spouse and I don’t earn a combined $160/ hour to keep up with that ratio.
USA population has increased 50% since 1975. The amount of livable land has increased 0%. Technology has also forced existing people to move from rural areas towards urban areas for employment.
So now there’s over 50% more people all competing to own pieces of the same limited space. What else can happen except prices (regardless of inflation) get driven higher to meet supply:demand equalibrium?
There’s a non-stop chorus of people saying “Traditionally housing used to be cheap, somebody ought to do something!” as if there’s anything to be done except drastic population reductions. Even if the government outlawed expensive housing, that 50+% could never purchase because there’s simply no new land.
If people want “cheap traditional housing” it’s easy: go buy a house where no one else lives, like downtown detroit. It’s a bargain.
Yeah Detroit, cute. Tonight I’m looking at housing in Schnectady, NY with my jaw on the floor. Even in the gunshot capital of Upstate NY, rents are beyond what I can afford as an RN, forget purchase prices… all to live in the ghetto.
Checked out Fort Plain area, apparently it went from PWTville to the hottest NYC getaway in the past decade. Not one rotting trailer home is affordable unless I was able to move into the $5k 70s throwback in the Utica 55+ community, which I just may pass as 55, this search is quadrupling my grey hairs. I’ve long spouted how bananas NYS is, but this is beyond any concievable logic. I’ve lived up there years ago. Its Menonites, corn and a massive food dessert. Thats. It. How is a 3BR home $3-4k to rent, but only Sept-June as they boot you out to AirBnb for the summer tribe.
Locked into NYS for 9 more years, failing SHTF which at thos point would be sweet relief.
Home prices are up 30-50% in a whole lot of places that don’t fit your description at all, like small towns in the Midwest and the large cities in the south and southeast that aren’t constrained by geography. This is home price inflation stoked by the Fed holding rates artificially low, pure and simple, as soon as rates were allowed to be more moderate, lo and behold, no more housing hyperinflation.
I still think they’re not going to cut any rates this year.
I hope you’re right.
Same.
The fact of the matter is shelter costs are still increasing 4-6% yoy and keeping cpi in this 3-4% range. Fed stated goal/mandate is 2%, don’t see that happening till shelter comes into 3-4% yoy range. If the house price increases from pandemic/zirp days are still working through, dont see fed goal happening anytime soon. Fed will start cutting with cpi still 50% higher than goal, LOL.
If 4 rate cuts can become 1 rate cut, then 1 rate cut can become zero rate cuts.
And Wall Street is acting like we’ll have negative interest rates by the end of the month.
Wall Street doesn’t care because rates are unlikely to go higher.
Steady rates with increasing corporate earnings (as they have been) means higher stock prices, just not as fast as with the added boost of declining rates.
Wall Street originally expected 7 cuts this year, now it’s down to 1. Maybe that’s the reason the S&P 500 is up “only” 15% year to date instead of 30%.
A rate-cut cycle as deep as what the SEP currently suggests through 2026 (even after recent upward revisions) could well reignite a 1990s-like all-out mania.
Does the Federal Reserve really not have any tools to restrain the stock market without squeezing the rest of the economy?
“Does the Federal Reserve really not have any tools to restrain the stock market without squeezing the rest of the economy?”
They (along with the Treasury) had a golden opportunity in front of them early last year. They could and should have allowed uninsured depositors in Silicon Valley and Signature banks to take an appropriate haircut. Naturally, they blew it: they moved heaven and earth to bail out a bunch of pampered techbros, sending a clear signal that the markets did not miss.
They had another golden opportunity in front of them late last year. All they had to do was keep their big jibbering yaps shut and watch the data. Naturally, they blew it: they deliberately sent multiple public signals that they were itching to cut rates in 2024, resulting in the bizarre spectacle of a rate-cut-mania rally across the economy just as inflation visibly reaccelerated.
So yes, they have a tool. But, being who they are, they’ll never use it. Think of that tool as a great big banner hung in the office of every FOMC member that says “STOP MAKING GIGANTIC UNFORCED ERRORS.”
Fed Chair Powell said he does not have “a definitive answer as to why people are not happy with the economy.”
LMAO! What a joke he is.
elbow, that’s because Powell and the rest of the numpties at the Fed really believe that the economic aggregates they rely upon are somehow evenly distributed across the population — it’s impossible for them to see pain they’re not looking for.
“rates are unlikely to go higher”
Haha
Yes, they do have a solution, by admitting they’re completely over their head and its a silly notion to have sheltered ivy league grads or anyone for that matter control the money supply and mess with rates and putting in their resignation and shutting down this whole Commie mitee. Employment, prices, rates can take care of themselves just fine and much better without some kind of central planners. Is it just to give some supposedly prestigious job to these people who don’t want to do real work, which would be a lot better for their health and actually produce something useful?
The fed’s job is to control inflation, not to socialize public companies by “restraining the stock market”
Too bad for the Fed that the correct inflation control tool is fiscal policy, which lies outside their remit, grant.
The tool, if inflation is higher than wage growth, is reduced corporate profits, as either people buy less stuff, or they demand higher salaries.
It just takes time to work it’s magic.
Wall Street is acting like a couple trillion more dollars will be printed this year with exponentially more to come. Your stocks aren’t going up, your money is going down.
It’s record narrowest market breadth isn’t it?
So stocks aren’t even ‘going up’
The index value is.
Basically AI hype, to my eyes the equivalent of dot com, omniverse, NFT/blockchain type hype, is driving any apparent growth.
Strip all that out and you’re losing against inflation AND being invested in stocks.
“If 4 rate cuts can become 1 rate cut, then 1 rate cut can become zero rate cuts.”
1 rate cut can become 3 rate HIKES, too.
If we extrapolate from 4 to 1 and then from 1 to…Wait. What’s a negative rate cut mean!? End of universe???? OMG.
/s
I wonder what CPI would be without insurance included. It makes up something around 2% of the basket, but the increase is 3 to 4x anything else. It also typically lags inflation as insurance companies react after they see rising costs and not before.
As far as the Fed pushing back on targeting something above 2% (I think 3% is a good number), why are they so stubborn on 2%? It’s supposed to be average over a period of time. If wages are keeping up with inflation, it shouldn’t be a problem.
I’m starting to get concerned that the Fed is missing indicators that areas of the economy are slowing. Consumer discretionary, vehicles, large home improvement projects (big box home centers seeing slower sales, lumber prices down), etc. I’m getting this feeling that the Fed is so scared of inflation going back because of a couple rate cuts that they risk another recession.
“Why are they so stubborn on 2%? It’s supposed to be average over a period of time.”
If it’s supposed to be an average, they’re going to need to get core inflation below 2% for a while to even out the big spike the last few years.
Yeah, but based on inflation data since 2010 there were 7 times we were under 2%. Twice we were under 1%. In the 2010 to 2020 time frame, the only times we were above 2 we were at 3%, 2.1%, 2.1% and 2.3%. For 2010 through 2023, taking an average, we are running at 2.6% inflation. We are barely above the 2% long term average. It gives the Fed room to allow for say 3% inflation if the economy can handle it.
You’d think that 2010-2020 time period might have inspired a rethink where the relationship between the Fed rate and inflation is concerned, but nope — like the Bourbons they have learnt nothing and forgotten nothing.
Hahaha. Let me guess, you’re just another housing speculator who’s getting really scared?
We NEED a recession. It’s a healthy part of the business cycle. Wake up.
But supposedly the goal of the Fed is to even out the highs and lows and keep the economy steady. How does anything here imply I’m a housing speculator?
At 2% your savings lose half their value in 36 years. At 3%, they do so in 24 years. That ain’t nothing.
You’re assuming no interest is paid on those savings. Right now interest paid on longer term savings is greater than inflation. Even if the Fed rate declined to 4.25 to 4.5 (which I believe it will stay there for a while once rates finally drop) you would still get interest in excess of 3%.
The problem is that tax is paid on the interest. The interest rate net of tax is considerably less than inflation. Bye bye savings.
2% is already a lot. Your money loses half its value every 25 years. And the Federal Reserve has already taken far greater liberty with this target compared to other developed economies, including the use of an alternate inflation measure (PCE) that almost always runs below CPI, and the flexibility of temporarily exceeding this target (per their 2020 framework) following a deflationary recession.
I don’t think you’ll find much support for raising this target among the overwhelming majority of American consumers or politicians/policymakers.
As I responded to someone else, you’re making an assumption that your money won’t make any interest.
Sorry, didn’t see your other reply. You’re assuming that we’ll be allowed to earn interest on our savings. This wasn’t the case from 2008-2021. And the biggest banks are still paying 0.01% APY to this day.
2% is a totally arbitrary target. There may or may not be a scientific case for raising it, thanks to the last 35 years of inflation-targeting experiments.
Of course “a majority of americans” would resist a higher target rate, because the majority are uninformed of economic theory. They just look at price stickers and don’t realize how deflation would actually disrupt their standard of living in a messy way.
You’re right that any increase to the target rate would require smart people to make the case, and other smart politicians to recognize it should be gone for the good of society, despite the ignorant public disbelieving.
It’s much like taking your dog to the vet: she hates going there, but we understand what she does not so we do it for her own good.
As someone understands economic theory I’d disagree with that statement. Raising the inflation target would be detrimental to anyone living on a fixed income and the lower 50% of the population. It punishes savers by devaluing their money. Yes deflation in a number of areas would be bad now that prices are entrenched. If it had been dealt with quickly the price jumps would have been more like price gouging during a hurricane – then prices drop back to normal when the disaster is over. The economy could have handled that. Additionally real estate asset repricing the economy could handle because it’s synthetic wealth. If someone makes only $150k profit on the sale of their house vs say $200k or $250k, they still made a lot of money and that isn’t going to shock the economy. With the sizeable equity gains a 10-20% repricing could be absorbed. It’d be great to have a year or two of 1% inflation to offset the last few years.
Also let’s be real a lot of the inflation numbers feel bogus. Most of my grocery items are up over 50%. My gym membership is up 42%. Clothes are up 20-50% depending on the brands, you want to grab a beer afterwork that’s up 30-50%. These aren’t all necessities but it’s getting harder and harder to maintain my 2019 lifestyle even with wage increases
MB – with respect to grocery pricing, we all struggle with the fact that food production/distribution and freshwater availability have their own variable, and increasing costs intimately tied to growing demands from a massive spacecraft population and a declining ability of those ‘free’ natural systems to maintain any sort of price stability of the costs of human nutrition, let alone the longer-term implications.
Supply and demand. It’s everywhere, in everything, and rarely in balance (even without us clever monkeys at the current top of the food chain).
may we all find a better day.
Also, another recession isn’t the end of the world. In the past century, the US economy has gone through something like 12 to 15 recessions. Besides the Great Depression and mortgage meltdown, most recessions are garden-variety ones that last for a few months, wring out the excesses, and make the long-term economy more stable.
Modern policymakers are so scared of causing minor downturns, they let excesses grow out of control and then when asset bubbles eventually implode, completely wreck the economy and require huge amounts of fiscal & monetary firepower to “rescue” it.
I’ve been laid off twice in my career. Recessions serve a vital purpose in the business cycle & economic stability.
We need the asset prices esp the assets which matter to people ( Housing ) come down bigly so that working folks can at least have a chance of owning a home instead of working/paying rents to the elite class.
“It’s supposed to be average over a period of time” you do not get to decide what the target is “supposed” to be though. If hyperinflation s
showed up for a year, would you suddenly say on day 366 “oh, NOW it is ok because 10,000% inflation matches last year’s average”?
The 2% target is arbitrary. Maybe they will decide another arbitrary # makes sense later on. But they can’t raise their target at the same time they’re struggling to hit it. That would send the message that the fed will ALWAYS change the target when an election is looming, and that would destroy their credibility.
The fed’s credibility is half of their power, which is why stocks gyrate on dot plots: investors consider their predictions credible.
Just be thankful the target is not even lower. Plenty of uninformed loud people actually believe 0% inflation or even deflation would be healthy (despite historic history showing otherwise)
The thing you’re missing is it’s not the level of inflation, it’s the sentiment around it. Right now there are far too many people ‘waiting’ for the Fed to cut so that the party can begin again.
This is the problem. Even if unemployment goes much higher and inflation falls to zero – if, say, most homeowners, are still just waiting for rate cuts so they can go crazy again, then as soon as the Fed starts cutting inflation will take off. Similarly, if the Fed indicates that it will just let inflation be 3%, then the rate cut folks will get excited and start saying ‘well, if inflation shoots up again, the Fed will just change the target to 4%, or 5% etc etc’.
The Fed/Govt created a monster during COVID because the general public now understand that they are much more powerful than they were lead to believe (I still remember all the bond vigilante scaremongering after the GFC). It has to unwind this enough that people no longer believe that the govt will just bail everyone and everything out as soon as hard times come. IMHO this is going to take a long time (higher for longer) and some real pain to achieve (like enough people losing their shirts that you get scared might be you next). It is very hard to gauge this, but from my talks with regular folks we are not there yet.
I think the Fed could successfully keep their credibility that as long as wage increases match inflation they are ok with inflation running at wherever the rate might be. It still sends a message to the market that they will react if inflation starts increasing above wages increases, or wage increases start decreasing without inflation decreasing. This Fed lost all credibility with me when they didn’t stop QE at least 6 months sooner. When I saw the markets recovered and they kept printing money I knew it wasn’t going to be good.
So far, two reporters that seem to have found religion: “why would you cut rates at all if your year-end inflation forecast is above target?”
So far, two reporters crying for their precious rate cuts (cough cough Timiros).
Make that three crying for rate cuts with Victoria’s question.
One of these jagoffs had the nerve to present the fact that McDonald’s has announced a $5 meal deal as evidence that inflation is over. Absolute clown world we’re living in. Powell should have pushed back a lot harder on that one.
Jagoffs, lol! I am a Pitt alum and I laughed as soon as I saw jagoffs.
Give the man a taser like Wolf says.
I need to give Powell my special presser-Taser. Each reporter that asks a stupid question, ZZZZAPPPP
I couldn’t tell if Powell was trying hard not to laugh at that question (as I was listening to an audio feed)
Ignoring the fact the McDonald’s deal is a temporary promotion that only runs through June & not a permanent price drop, the post-lockdown inflation story has been about services, services, and services, as anyone paying attention would have known. The fact Powell had to point this out was an embarrassment to the journalist who should presumably be well aware of this.
Those pivot mongers include Steve “lies, man!”
I don’t know how Powell keeps his calm demeanor. One reporter basically demanded her rate cuts by summertime.
Steve was the 4th rate cut crybaby of the presser.
Rate cut mania was through the roof this morning. Glad the Fed threw cold water on it.
So much cold water that mortgage rates dropped back down to 6.98%.
Won’t last. Probably knee jerk reaction.
There is a small war in ME hammering the Suez canal shipping lane. Freight rates are “higher for longer”. I suspect inflation will once again rear its ugly head again….
That would only show up in goods CPI, not services CPI.
CPI report coming shortly.
understood
PPI*
It would show up in producer prices
Yes, first, and already has, and from final demand PPI it migrates to consumer prices as this stuff gets passed on.
The federal funds futures markets, which are currently pricing in an immaculate disinflation or softish landing scenario, don’t see rates going below 4% through 2029 (although many of the further-out contracts are thinly-traded.)
Based on the lack of actual rate cuts up to this point, it does appear the FOMC is more conservative & careful in their actual policy actions than the premature dovishness in some of their communications over the past year.
I wonder if there’s a segment of the committee that would resist further rate cuts beyond a certain point (like the 4% suggested by FFR futures), if the economy doesn’t significantly weaken, regardless of inflation. So far the dot plot doesn’t show that, although longer-term dots are creeping up.
They’ve been VERY slow but steady in bringing up the median projection of the longer-run rate and have now fallen well behind market projections. The funny thing is that Fed governors themselves, when they talk, peg the longer-run rate quite a bit higher, and that’s in part what those market projections are based on.
Does plans to cut rates suggests the FED expects Treasury issuance to decrease.
If the FED cuts rates but Treasury debt issuance increases will creditor just keep buying and accept lower rates ?
Or does it suggests the FED is ready to expand the BS again to protect the federal budget ?
Jerome Powell’s (FOMC’s) press conference summary:
“When the moon is in the seventh house and Jupiter aligns with Mars then peace will guide the planets and love will steer the stars.”
Dot plot methodology: “Mystic crystal revelation.”
Why this period of inflation is “different” than any other historical instance: “This is the dawning of the Age of Aquarius.”
Jerome Powell’s statement to the effect that everything they [FOMC] does is for the public good:
“Harmony and understanding
Sympathy and trust abounding
No more falsehoods or derisions
Golden living dreams of visions.”
Quotes from the group: “The Fifth Dimension;” song: “Aquarius/Let the Sunshine in,” released 1969.
Thanks. I’ve just experienced the mind’s true liberation.
…to give credit where it’s due, the Fifth Dimension’s smash-hit cover of this song was taken from the scandalous (for the time) Broadway musical: “Hair”…
may we all find a better day.
Private equity deal flow picked up significantly starting on June 1. In my conversations with 6 different firms I work with, they all told me some variation of, “we’ve re-worked our models to assume higher rates for the foreseeable future and we’ve figured out how to make deals work at these higher rates.”
Take that for what it’s worth.
That’s going to happen to CRE as well. And to businesses in general. Everyone is trying to figure out how to do this. That’s exactly how an economy adjusts to “somewhat” higher rates (5.5%), and just keeps going.
doesn’t that just mean that a lot of projects that were viable under 0% aren’t now? and that capital will be deployed differently?
it also means that assets have to reprice, which for stocks, hasn’t happened yet.
CRE assets are now being massively repriced. The going rate for office repricing is around -60% to -70% from pre-pandemic prices.
Bonds have been repriced, but not sufficiently. Lots of other assets are still awaiting repricing.
In terms of uncompleted projects that seemed viable during the ZRIP times, they will may have to be restructured/repriced. So that apartment tower with a $300-million construction loan on it may be taken over by its lenders, who might then sell it to another developer for $150 million, and then it’ll work at current rates. Or they can modify the loan to accomplish the same thing more quickly with the current developer.
“Repricing” is a very nice word for a very messy process, similar to “digestion.”
…and Ouroborous munches away…
may we all find a better day.
I also saw this: “No going back to pre-Covid levels
The FOMC is coming to think that rates won’t return to pre-COVID levels, he said. He declined to directly answer whether he thought the neutral rate had increased, noting that it’s a theoretical concept and not directly observed. The neutral rate is the level at which interest rates neither speed up nor slow the economy.”
which is real interesting but seems to be completely ignored by market and the participants.
But again, if the stock market and assets like housing keep increasing, say at the rate of 1$ a month, why should the investors worry about interest rates 5.25% or 4.25%?
The concept of neutral rate doesn’t make much sense to me unless its tied to a timeline. Supply and demand constantly change based on several factors, including the level of speculation and momentum in the economy. Therefore, the neutral rate changes as well.
Powell’s 5.3% ST rate might be restrictive (above the neutral rate) if it is applied for 5-10 years, as it would ultimately slow growth and lead to a higher degree of unemployment, but a 5.3% rate certainly is not restrictive in the short term when stocks and RE are making new highs, speculation is rampant, and people are infected with an inflationary mindset.
In my view Powell is reluctant to fight inflation within a reasonable period, and that’s why inflation is still raging. I think he’s worried what a recession might trigger. He’d prefer to extend the inflation to increase chances of avoiding a recession, even it means tacking on a lot more excess inflation (above 2% inflation).
His empathy at press conferences sprays salt on the wounded. The results haven’t matched the rhetoric.
Powell himself said that the neutral rate was more of a theoretical concept than an actual interest rate at any specific point in time.
I think in future hindsight, we’ll conclude “rates were too low.” But the rate cut crybabies and Fed pivoteers are a very vocal group right now.
“neutral rate”, means inflation is steady when all other factors are also neutral.
When other factors (such as supply and demand) become so unbalanced as to change inflation, then the target rate is raised or lowered away from neutral to counterbalance those other factors.
That is the theory at least.
If you believe the Inflation numbers then what Powell said might make some sense. But since I don’t believe the numbers put out by the government, everything he said is a pile of bull s$it.
Every time someone says “i don’t believe the numbers” they’re still silent on what methodology -should- be used to measure inflation.
to paraphrase the classic: “CPI is the worst way to measure inflation, except for all the ways we’ve already tried”
Grant,
We now have a 6 day supply of houses listed for sale here in the Swamp. Prices are heading up in spite of the 7% mortgage rates. Get ready for some serious housing and equivalent rent inflation on the way. I believe my eyes. You can believe the government.
Consumer credit card debt could use more coverage than fed funds and commercial RE rates, IMO.
As of 2024, the total credit card debt (bank and retail) in the US was about $1.13 trillion, a big increase from previous years. Rising balances affect consumer spending and borrowing reflects widespread reliance on credit cards.
So, while the average Joe Lopez can read the fed changes in the 5.5% range, his family is paying from 20% – 25% APR on their credit card and likely doesn’t have a clue. An example of the terms printed on a typical paragraph of a bank credit card statement might make the average person consider learning Chinese before trying to understand it:
“Interest Charges accrue and are compounded on a daily basis. To determine the Interest Charges, we multiply each Balance Subject to Interest Rate by its applicable Daily Periodic Rate, and that result is multiplied by the number of days in the billing cycle. To determine the total Interest Charge for the billing cycle, we add the Periodic Rate Interest Charges together. A Daily Periodic Rate is calculated by dividing an Annual Percentage Rate by 365.”
Yet that example paragraph is only a fifth the length of another entire section called “Calculation of Balances Subject to Interest Rate.” It’s also worth adding that it’s likely most consumers paying their credit card bill don’t realize that in many cases purchases are also charged interest from the minute they check out. I wonder how many people paying a $100 at the grocery check-out know they have just taken out a 17% loan.
IOW, while the captain and his helpers are on the ship’s bridge, watching the weather and the waves, the boat may be sinking from the leaks filling up with consumer seawater.
Credit card debt is a measure of consumer spending, not distress.
“in many cases purchases are also charged interest from the minute they check out”
No offense but seems like you don’t understand how credit cards work.
You’re charged interest on the statement balance – the statement doesn’t exist till the end of the month. Interest doesn’t accrue till then.
Lots of WS commenters have their cards set to autopay the full balance at the end of the billing cycle and don’t pay a dime in interest. Many of us also exploit the points programs and/or new signup offers and actually /profit/ off credit cards.
Curious,
Credit cards are a universal payment method in the US. Close to $6 trillion in spending will be run through credit cards in 2024, including for company-reimbursed travel spending, which is a lot. Most of it will be paid off by due date and never accrue interest, and credit-card interest rates have no impact and don’t matter. Only a small portion actually becomes interest-bearing debt.
Credit cards balances are statement balances and do not reflect interest-bearing debt. If you pay by due date, there’s zero interest, and you get the “2% cash back.” What’s not to like?
I’m getting regular advertisements to open a cashback *debit* card with my credit card issuers, so banks are definitely recognizing the increasing costs of offering interest free grace periods for those who pay their full balances each month.
“What’s not to like?”
Plenty
Putting out cash is a lot different than scanning a card. Spending is decreased dramatically when a person has to fork over the cash to make purchases. There is no spending discipline when using the credit cards for everything under the sun. Merchants don’t care whether you spend more than you should, go into debt, or go bankrupt. All they care about is making the sale right then and there. Consumers are the suckers who are milked for all they are worth. If they get into trouble with credit cards there is always a Greenspan home equity loan or cash out refi waiting in the wings.
“It’s also worth adding that it’s likely most consumers paying their credit card bill don’t realize that in many cases purchases are also charged interest from the minute they check out. ”
This is nonsense. Have you ever had a credit card?
MM and Pea Sea, have you? Curious is absolutely correct that there is no grace period with most credit cards if you carry a balance. So yes, the interest accrues immediately from the purchase date in those circumstances. You need to pay off the statement balance to regain the grace period.
I never carried a balance in my life (except 0% offers in the past), so I never tested it personally, but I remember that conclusion from reading terms and conditions years ago. A quick Googling confirms Curious is correct.
That was true 20 or so years a ago. A law changed awhile back and if you pay your statement balance in full every month you are not charged interest. If you do not pay your statement balance in full, only then are you charged interest.
MB, this was about scenario where you do NOT pay statement balance in full, so your response does not make sense.
What makes you so sure “Average Joe Lopez” can’t read his credit card statement?
Interest charges show up as a line item on CC statements. If you think “Average Joe Lopez” can’t comprehend an interest charge, then you are implying he also is unaware of how much he paid for groceries or a tank of gas.
If “Average Joe Lopez” is so unaware of his regular monthly bills, there is NO chance he is simultaneously taking a keen interest in fed target rates.
Of course, we know that the dot plot is subject to group think, and has been ridiculously wrong at inflection points in the past. No one sees a crash coming that would have the Fed cut rates faster than they raised them; unless, of course you are trying to sell a house in Cape Coral, Florida or trying to sell an urban commercial office building. No bid. It is not the wealthy who lead us into recessions, it is bottom 20%, and they are broke and hurting.
I must disagree with your final statement. The GFC in 2208-2009 was due to the wealthy (i.e. banks bets going under water). 80% of the stock market is own by the 1%.
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These are not cures but short term remedies that are supposed to “bring the fever down”. If a long term recovery is the goal, some base rules of the game need to change…The patient has stopped his uncontrolled urge to eat, now he has to start exercising. Lifestyle changes are necessary.
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Re: ” If you pay by due date, there’s zero interest.” Luckily I’ve been taking advantage of that fact for many decades. But there were some occassions where I didn’t get the check in the mail or online transfer in time. In any case, the interest charges on new purchase from the second they’re made was a new feature added (slipped in) about 15 years ago. I asked ChatGPT to make sure:
“if you do not make a payment on time, credit card purchases from the moment they are made can be included in calculating interest. Here’s how it typically works:
“Loss of Grace Period: When you make a payment on time and in full, you typically benefit from a grace period during which new purchases do not accrue interest. However, if you do not make at least the minimum payment by the due date, you lose this grace period.
“Immediate Interest Accrual: Once the grace period is lost due to a missed or late payment, new purchases may start accruing interest immediately from the date of the transaction. This means that all new purchases will be subject to interest charges from the moment they are made, until you pay off the balance in full and regain the grace period.”
On my BofA cc statment, under “interest Charges,” there’s a separate line called “Interest Charged on Purchases.” After being late a long time ago, I started seeing the charges in that column. According to the terms, if you’re late on paying the minimum due, that new charge stays on for about two months, assuming you’re not late again.
So what am I not understanding about all this? In any case, about 11.4% of the U.S. population had delinquent credit card payments (30 days or more) in the first quarter of 2024. And average credit card debt for an American consumer is approximately $6,864. Those figures are for consumers only, I believe.
Set your balance to autopay. Also, if you’re good about making payments, but miss one here and there, its worth asking if the late fees/interest charges can be waived.
Before I had my autopay setup, Capital One did that for me once when I paid my bill a couple days late. But now the full balance autopays, so I don’t need to manually make the payments and risk forgetting.
In a busy world, autopay is your friend.
“In a busy world, autopay is your friend.”
Ben doing that for years.
Been
Maybe I’m missing something here, but there’s a more serious and frightening aspect to that New Purchases interest. On my cc bill, in the section called “Paying Interest,” it states in their microscopic font size:
“We will not charge interest on Purchases on the next statement if you pay the New Balance Total in full by the Payment Due Date, and you had paid in full by the previous Payment Due Date.”
Doesn’t that mean that for the average consumer, even if they pay their minimun due, they will still be paying interest on all new purchases unless they first pay off their $6,864 Total Balance, not simply the minimum due?
Your quote:
“…if you pay the New Balance Total …”
Pay the total balance in full by due date every month, that’s what that means, and there’s no interest. If you don’t pay the balance in full by due date, or absolutely worst, if you only make the minimum payment, there’s still an unpaid amount carried over, you will be charged interest on the total balance every day you owed it, obviously.
You need to learn the absolute basics about credit cards before you use them, that’s my advice.
Got all that. But if you don’t pay off Total Balance Due, as opposed to the minimum due, doesn’t it mean you will still be paying interest on all new purchases from the second you swipe your card?
Curious,
I give up. It’s hopeless. That was your last comment on this topic. You need to learn the very basics about credit cards, but do it somewhere else.
“Doesn’t that mean that for the average consumer, even if they pay their minimun due, they will still be paying interest on all new purchases unless they first pay off their $6,864 Total Balance, not simply the minimum due?”
Only paying the minimum due on a credit card is a sure way to rack up lots of interest charges.
Always always ALWAYS pay the FULL STATEMENT BALANCE when its due – that’s the key to your credit card not costing you money.
Anyone carrying a CC balance has fundamental financial planning problems.
Such issues cannot be solved by comprehending the fine print in CC agreements.
Did anyone else catch Powell’s answer to one of the questions where he said “2.6 or 2.7% isn’t a bad place to be” in reference to inflation?
Or did I misinterpret that?
Does any of this matter, if the goverment continues to spend trillions more than it has?
What we need are higher rates an a long mild recession.
2.6% is still 30% more than target rate of 2%.
The interest rate differential enables a carry trade that is resulting in hundreds of billions arriving into the US each year. This massive money flow partially negates the FED’s objectives and contributes to inflation. This foreign appetite for US debt allows Congress to continue huge deficit spending. This carry trade looks set to grow as the differential increases and the dollar appreciates. Wolf, please write a piece on how this cary trade affects the economy of the US as well as the economies of the sending countries.
In terms of the economy and inflation, it doesn’t matter who holds Treasury securities or other US securities, whether domestic investors or foreign investors placing their USD holdings. The US is paying for its vast trade deficit with USD, and some of the USD cash circulates further in global trade, and some gets invested in USD assets.
Why does not the FED discuss more about r-star? It should be higher than they penciled in (in reverse from after the GFC decade). Instead they play a stupid game again with FED plots where the median shows 100 basis points of cuts again. Being data dependent and not engaging in real discussion about future expectations it is confusing and not healthy for all involved.
What do you think?
The fed plot for 2025 of course.
r-star is just a concept. It doesn’t actually exist. It’s not observable. No one knows how to measure it. Different economists have come up with different models to come up with a number, and they’re all vastly different. So it’s fine and dandy to discuss r* in conceptual terms and in theoretical terms, but the Fed has to make rate decisions, and to base those decisions on a concept that no one can even measure would be foolish.
That said, over the longer term, the economy will tell you if rates are restrictive or not – and that’s what Powell has been saying, including yesterday. We’ve seen, they’re very restrictive in some sectors (for example, real estate), and they’re not restrictive in others (consumer spending, business investment, and business consumption, for example). Maybe it will just take a while longer to get to those sectors; or maybe rates are not yet high enough.
“ The median projection for “core PCE” inflation by the end of 2024 rose to 2.8% (from 2.6% in March and from 2.4% in December).”
Based on that can they really continue to make the statement they are strongly committed to bringing inflation down to 2% with a straight face? How about Inclined? Hoping for? Gosh it would be swell?
Wolf,
Many thanks.
FOMC just as clueless as ever. 6-month T-bills yield remains above EFFR so no rate cuts this year.
Next move in FF should be higher but when did the Fed do anything that it was supposed to do at the time it was supposed to.
Housing cure for prices is everyone who refinanced at sub 3% rates put their homes on the market tomorrow, let’s create a massive flood of supply and bring home prices crumbling down for the downtrodden younger generations. United we Stand, call your realtor tomorrow, let’s get her done boys.
The other solution would be for the “downtrodden younger generations” to quit buying and quit chasing after every home as soon as it hits the market and just walk away, all together, from the market for a few years. GenZ and Millennials are the biggest buying force now, and they’re the ones driving up prices. So if they quit buying, the market will crater.