Fed plans to raise rates as soon as March to cool inflation

[Blue3]

But now we might have a recession…

[Southern Senator North Carolina Yankee]

People with bad credit scores aren't getting mortgages anymore, but, if there's a systemic risk issue with financing for housing, it won't matter that these people seemed like good bets to lenders at the time. They are very exposed.

Learned nothing, forgotten everything.

[jaichind]

People with bad credit scores aren't getting mortgages anymore, but, if there's a systemic risk issue with financing for housing, it won't matter that these people seemed like good bets to lenders at the time. They are very exposed.

Learned nothing, forgotten everything.

Many of the financial innovations over the years that led to a crisis were and are good ideas but not well understood in terms of pricing and risk profile when they first came out.  In the end, they actually do become mainstream even though they were the cause of all sorts of problems when they first came out.  Junk bonds of the 1980s caused many problems but became mainstream by the late 1990s.  The MBS CDOs that were part of the 2008 crisis are now actually making a comeback and are becoming mainstream.

I never felt lending to those with poor credit ratings was a problem as long as the risk was factored into the interest rate.  This is why I always opposed anti-usury laws since the alternative was for those with poor credit ratings to go underground to get their funding.  Same in this case.  The pricing for these loans have to take risk into account and I think things will work out fine.

[Frodo]

And just as important as raising interest rates to fight inflation is reducing the supply of money in the economy, aka 'quantitative tightening':

Fed’s quantitative tightening is about to arrive: What that might mean for markets

The Federal Reserve’s almost $9 trillion portfolio is about to be reduced starting on Wednesday, in a process intended to supplement rate hikes and buttress the central bank’s fight against inflation.

While the precise impact of “quantitative tightening” in financial markets is still up for debate, analysts at the Wells Fargo Investment Institute and Capital Economics agree that it’s likely to produce another headwind for stocks. And that’s a dilemma for investors facing multiple risks to their portfolios at the moment, as government bonds sold off and stocks nursed losses on Tuesday.

In a nutshell, “quantitative tightening” is the opposite of “quantitative easing”: It’s basically a way to reduce the money supply floating around in the economy and, some say, helps to augment rate hikes in a predictable manner — though, by how much remains unclear. And it may turn out to be anything but as dull as “watching paint dry,” as Janet Yellen described it when she was Fed chair in 2017 — the last time when the central bank initiated a similar process.

QT’s main impact is in the financial markets: It’s seen as likely to drive up real or inflation-adjusted yields, which in turn makes stocks somewhat less attractive. And it should put upward pressure on Treasury term premia, or the compensation investors need for bearing interest-rate risks over the life of a bond.

[jaichind]

https://www.cnbc.com/2022/06/01/jamie-dimon-says-brace-yourself-for-an-economic-hurricane-caused-by-the-fed-and-ukraine-war.html

"Jamie Dimon says ‘brace yourself’ for an economic hurricane caused by the Fed and Ukraine war"

Dimon said:
" Several aspects of quantitative easing programs “backfired,” including negative rates, which he called a “huge mistake.”"

[jaichind]

I think this signal is not as valuable currently due to the stark difference between 2-year and 10-year inflation expectations.  What is needed is a comparison of real 2-year and real 10-year yields.

[jaichind]

https://finance.yahoo.com/news/exclusive-musk-says-tesla-needs-070712003.html

"Exclusive-Musk feels 'super bad' about economy, needs to cut 10% of Tesla jobs"

Mush wants to cut jobs by 10% because he "feels super bad" about the economy.

[jaichind]

Bloomberg reports: Nobel laureate economist Robert Shiller sees a “good chance” of a US recession that’s at least in part the result of a “self-fulfilling prophecy” as investors, companies, and consumers grow increasingly worried about a downturn.

[jaichind]

May 2022 CPI YOY came in at 8.6% which is a good deal higher than the expected 8.2%.   Hopefully the Fed gets the message and act aggressively now before it is too late. 

[jaichind]

The unexpectedly high price increase came from food and energy which means the impact on the average consumer would be worse than these numbers would imply.   

[jaichind]

The CPI MoM increases hit 1.0% which means the run rate for USA CPI is almost the same as Russia. 

[jaichind]

Fed fund swaps clearly pricing in 50 bp each for the next 3 Fed meetings.   For the Dec meeting the swaps indicate a 25 bp increase. I suspect when we get to Dec it will also be 50 bp.   This means by the end of 2022 Fed Funds rate will be 2% higher than today which would be 3%  A start but no aggressive enough in my view.  Fed Fund rate should be at least 4% if not 5% by the end of the year.   The Fed is taking a lot of risk by being so timid. 

[jaichind]

The CPI MoM increases hit 1.0% which means the run rate for USA CPI is almost the same as Russia. 

I take that back.  Russia May CPI MoM just came in at .12% which is way lower than USA.  So going forward the USA run rate inflation will be higher than Russia.  Impressive given the sanctions Russia is under. 

[jaichind]

The University of Michigan Consumer Sentiment Index falls to 50.2 which is the worst reading ever in the history of the index when it started in 1978.  This level is below the worst levels achieved in the depth of the 2008-2009 Great Recession when they fell in the mid-50s.  It is also worse than the period in 1980 when the USA had a great inflationary surge.

[Omega21]

Fed fund swaps clearly pricing in 50 bp each for the next 3 Fed meetings.   For the Dec meeting the swaps indicate a 25 bp increase. I suspect when we get to Dec it will also be 50 bp.   This means by the end of 2022 Fed Funds rate will be 2% higher than today which would be 3%  A start but no aggressive enough in my view.  Fed Fund rate should be at least 4% if not 5% by the end of the year.   The Fed is taking a lot of risk by being so timid. 

While the FED is independent, we all know Powell's meeting with Biden is gonna go something like "um, could you please not do 75 bp until the midterms, pretty please?", so that's why I think we will only be at 3% by the end of 22. Not because they aren't aware of how royalty they screwed up with their "transitory inflation" and rabid money printing.

Anyway, thank god they didn't give out more "stimmies", we could have been over 10% by now.

Also, what's the word on American MSM, they still selling the "supply chains!!!!" story lol? 

[jaichind]

The latest Fed swaps show a 75bp increase for at least one of the 3 upcoming Fed sessions.  Markets are down to reflect this fact.

[jaichind]

Real (after discounted by 10-year inflation swap) 10-year treasury yield surges to 0.2%.  This is the highest since May 2019.  I like to see this rise to 0.8% or so which would be where it was in mid-2018

[jaichind]

PPI YoY just came in at 10.8%

[LabourJersey]

The University of Michigan Consumer Sentiment Index falls to 50.2 which is the worst reading ever in the history of the index when it started in 1978.  This level is below the worst levels achieved in the depth of the 2008-2009 Great Recession when they fell in the mid-50s.  It is also worse than the period in 1980 when the USA had a great inflationary surge.

This is a pretty fascinating stat. Worst than the Great Recession?

[jaichind]

The University of Michigan Consumer Sentiment Index falls to 50.2 which is the worst reading ever in the history of the index when it started in 1978.  This level is below the worst levels achieved in the depth of the 2008-2009 Great Recession when they fell in the mid-50s.  It is also worse than the period in 1980 when the USA had a great inflationary surge.

This is a pretty fascinating stat. Worst than the Great Recession?

Correct. Worst than any reading since 1978.  BTW, I think what is taking place today is more like 1980 with the great inflation.  I suspect in reality the situation is better than in 1980 since the respondents are more partisan.  Pro-GOP respondents are much more likely to give a worse-than-reality sentiment given their negativity toward the Biden/Dems resulting in a worse reading than justified by reality. But yeah, the siutation is bad and getting worse.

[jaichind]

The real 10-year yield rises to 0.5%.  It is getting close to my minimum target of 0.8%

[jaichind]

Fed raises rates 75 bp.  Hopefully this is the beginning and we can get to Fed rates of at least 4% over the next few cycles.  I suspect the Fed will still end up behind the curve.

[Omega21]

Fed raises rates 75 bp.  Hopefully this is the beginning and we can get to Fed rates of at least 4% over the next few cycles.  I suspect the Fed will still end up behind the curve.

What do you think are the chances of us getting Volcker'd in the next 2 years?

I am thankful for the buying opportunities over the coming months, but I wouldn't really like to see insane rates a la 80s.

[jaichind]

Fed raises rates 75 bp.  Hopefully this is the beginning and we can get to Fed rates of at least 4% over the next few cycles.  I suspect the Fed will still end up behind the curve.

What do you think are the chances of us getting Volcker'd in the next 2 years?

I am thankful for the buying opportunities over the coming months, but I wouldn't really like to see insane rates a la 80s.

Powell says 50bp or 75bp next Fed meeting.  We are very far from Volcker.  Also, there is another risk that was not there in the early 1980s.  Namely, the interest payments in the USA federal budget are under control only because of artificially low-interest rates since 2008.  If interest rates were to rise to where it needs to be to control inflation then that will blow a whole in the USA federal budget.  So between the Fed and the USA Federal government either they

a) Raise interest rates to rational levels and the federal government raises taxes and cuts spending

OR

b) Keep interest rates on the low side while accepting high but no crushing inflation which would be a tax increase and benefit/spending cut by proxy.

One way or another there is a massive resource gap between the federal government and the USA private sector that has to be closed over the next decade one way or another.  MMT will have to face reality one way or another over this coming decade.  Adam Smith will have his revenge one way or another.

[Southern Senator North Carolina Yankee]

Solvency did not have to beget austerity, the failure to maintain fiscal solvency over the last decade, guarantees austerity down the road.