Fed plans to raise rates as soon as March to cool inflation (user search)
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  Fed plans to raise rates as soon as March to cool inflation (search mode)
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Author Topic: Fed plans to raise rates as soon as March to cool inflation  (Read 19676 times)
jaichind
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Political Matrix
E: 9.03, S: -5.39

« on: February 10, 2022, 09:10:30 AM »

YoY Inflation for Jan 2022 came in at 7.5% vs expected 7.3%, highest since 1982.  Money markets are betting on one percentage point of Federal Reserve rate hikes by July.  The equity and bond markets pricing will factor this in as part of today's trading activity.

Also, there are some signs that medical and medical insurance costs that were growing fairly slowly in 2021 after a 2020 surge are moving upward again at a faster pace.
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jaichind
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Posts: 27,155
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Political Matrix
E: 9.03, S: -5.39

« Reply #1 on: February 15, 2022, 08:38:56 AM »

PPI yoy up 9.7% vs an estimate of 9.1%.  Upstream price pressure remain high. 
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jaichind
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Posts: 27,155
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Political Matrix
E: 9.03, S: -5.39

« Reply #2 on: February 23, 2022, 01:36:41 PM »

Grain prices like wheat and soybeans are surging almost 2% today on supply concerns to 9 year highs.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #3 on: February 23, 2022, 07:53:02 PM »

Grain prices like wheat and soybeans are surging almost 2% today on supply concerns to 9 year highs.
Thanks Putin.

Actually this is mostly about South America.  Recent Oil prices surge you can point to the current crisis in Russia-Ukraine but on the short run Russia is making a killing off falling RUB and rising energy prices.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #4 on: April 18, 2022, 04:12:24 PM »

Federal Reserve Bank of St. Louis President James Bullard said the central bank needs to move quickly to raise interest rates to around 3.5% this year with multiple half-point hikes and that it shouldn’t rule out rate increases of 75 basis points.

This is still too conservative.  Interest rates needs to be at or above inflation.  I would raise rates to at least 6% 
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #5 on: April 19, 2022, 10:58:46 AM »

Federal Reserve Bank of St. Louis President James Bullard said the central bank needs to move quickly to raise interest rates to around 3.5% this year with multiple half-point hikes and that it shouldn’t rule out rate increases of 75 basis points.

This is still too conservative.  Interest rates needs to be at or above inflation.  I would raise rates to at least 6% 

Is this some arbitrary rule or is there evidence for this?

Mostly about the time value of money.  When one party borrows money from another what is taking place is one party is deferring consumption in favor of someone that needs to consume resources earlier.  The rate of interest is compensation for such deferring of consumption.  It is illogical to set such an interest rate below the rate of inflation since in real terms you are asking the lender to pay the borrower to borrow money.   Historically the fed rate has always been above the rate of inflation with rare exceptions during recessions.  Even then the real int4erest rate being negative only lasts a year or so before reverting to being positive. 

Since 2008 this has been broken and it was only in 2018-2019 that the real interest rate become slightly positive again.  Even with base effects, one can argue that inflation is running at a 5%-6% at least so interest rates should be set there if not higher if the Fed is going to get inflation under control.  Unforintelly the Fed is still living in a post-2008 world and not realizing that you cannot just live in a permeinate emergency world without very problematic side effects.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #6 on: April 22, 2022, 07:47:05 AM »

According to interest-rate swaps the market expects half-point hike -- unheard of since 2000 -- in May, June, July and September to take the upper bound of the federal funds rate’s target range to 2.50%.

Too conservative in my view.   
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jaichind
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*****
Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #7 on: April 22, 2022, 01:39:10 PM »

It seems in interest rate markets there are now more bets on  multiple 75-basis-point rate this year.  That is not the consensus but it is good to see this is the way the Fed might move.  Moving rates to 2.5% by the end of the year is a complete joke.  Much more aggressive action is needed the massively reduce the liquidity in the market.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #8 on: April 25, 2022, 06:04:39 AM »

It seems in interest rate markets there are now more bets on  multiple 75-basis-point rate this year.  That is not the consensus but it is good to see this is the way the Fed might move.  Moving rates to 2.5% by the end of the year is a complete joke.  Much more aggressive action is needed the massively reduce the liquidity in the market.

More aggressive action would lead to a recession, many economists are worried that even as far as the Fed will go could  lead to recession. Rates need to go up yes, but it needs to be done gradually so that economic growth does not slow too much, all at once.

For me, a recession is a feature and not a bug.  A recession will allow for labor and capital engaged in value-destroying activities to be reallocated to value-creating activities.  Right now we have a situation where you are paying people to borrow money (in after-inflation terms.)  The longer this goes on the greater the economic distortions and worse the long-term economic growth prospects will be.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #9 on: April 28, 2022, 07:54:17 AM »

USA Q1 QoQ GDP came in at -1.4% versus an expected 1.0%.  Net exports and inventories seem to be the main reason.  This sort of shows that inflation is driven by excess demand which is beyond what the supply side can produce.   The only way out is to raise interest rates to curb excess demand.    Of course, it seems it is already too late. Stagflation is coming soon.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #10 on: April 29, 2022, 10:45:49 AM »

Fed rates swap markets now price in a 50/50 chance of a 75 basis points hike in June.  That would be the largest jump in Fed rates since 1994 and it seems very necessary.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #11 on: May 03, 2022, 08:07:52 AM »

IMF's Rogoff Sees Fed Hiking Rates Up to 5% as Things ‘Out of Control’

Finally someone that see things my way. 
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jaichind
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*****
Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #12 on: May 03, 2022, 11:43:58 AM »

USA Q1 QoQ GDP came in at -1.4% versus an expected 1.0%.  Net exports and inventories seem to be the main reason.  This sort of shows that inflation is driven by excess demand which is beyond what the supply side can produce.   The only way out is to raise interest rates to curb excess demand.    Of course, it seems it is already too late. Stagflation is coming soon.

The other good option would be investing in expanding the productive capacity of the supply side. We could just have more stuff! (Not that hiking inflation rates in the short term isn't a good idea, of course.)

But that very act of investment will in the short run push up demand for capital goods which will be crowed out by excess demand in the economy already.  The only solution is a large rise in rates which would remove excess liquidity in the system as well as remove economic activity which is clearly subtracting value so the freed-up resources can be deployed in increasing capacity which are going to value adding.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #13 on: May 04, 2022, 05:21:13 AM »

Just to get a sense of the excess demand in the USA economy, 2022 expected exports will be around 2.6% higher than 2014 exports but 2022 expected imports will be around 30.6% higher than 2014 imports.  And this is on top of a 2014 economy which already had a significant trade deficit.  The fiscal and monetary policies of the USA which made the assumption that the underlying issue was one of demand being too low to consume the productive capacity of the economy instead created the opposite problem.  In that sense the Obama, Trump, Biden administrations as long with the Fed should all take the blame.  Demand is so high now that it needs greater and greater net imports to fulfill.  The USA being the world reserve currency means that this can be spontaneous  financed world excess savings but on the long run there is no free lunch.
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jaichind
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Posts: 27,155
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Political Matrix
E: 9.03, S: -5.39

« Reply #14 on: May 04, 2022, 05:48:31 AM »

JPM CEO Jamie Dimon in an interview with Bloomberg said

a) Federal Reserve should have moved quicker to raise rates 
b)  There is a 33% chance of the Federal Reserve’s actions leading to a soft landing for the U.S. economy and a 33% chance of a mild recession.
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jaichind
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*****
Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #15 on: May 04, 2022, 01:49:22 PM »

Fed raises rates 50 bp but rules out 75 bp increase in the future.  Disappointing.  Fed is taking the risk of having to take much more dramatic steps next year.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #16 on: May 04, 2022, 06:27:19 PM »

The reception in the stock market was positive, probably due to the prospect of abatement in inflation.

Market went up because many including me expected a 75 bp move and the Fed communications seems to rule out future 75 bp moves.   Long term Inflation swaps went up as this means high inflation is expected to last longer.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #17 on: May 05, 2022, 06:38:25 AM »

BOE raises rates by 1% and indicates that

a) Inflation will peak out at over 10% in the UK
b) There will be a recession in the UK in 2023

India's RBI also did a surprise unscheduled 0.4% rate hike and there will be a lot more to come as the inflation surge in India is deemed to become out of control.
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jaichind
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*****
Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #18 on: May 05, 2022, 08:10:07 AM »

Former Fed economist Andrew Levin said in an interview with Bloomberg

"Unfortunately, the Fed is still not following the basic principles of sound monetary policy that it has laid out on its own website.

What really matters to the economy is the inflation-adjusted interest rate, which is the rate minus inflation. At this stage getting to a neutral rate, where it is no longer pushing inflation even higher, is the top priority. The monetary policy stance is neutral when the federal funds rate is just a bit higher than the underlying trend of inflation.

Right now the underlying level of inflation is running at about 5% once you take out transitory factors, so the inflation-adjusted interest rate is deeply negative (about -4%). Getting to neutral, as Fed Chairman Jerome Powell said himself Wednesday, is still a long way off. He appeared to take the possibility of a 75-basis-point increase off the table, preferring to stick with smaller hikes in coming months. And that means the Fed could still be adding fuel to the inflationary inferno, even by the end of this year.

And as we talked about in our previous chat, it's very plausible that inflation will be headed higher this year, not downwards. So it's clear the Fed has a long way to go. If it's going to start following the principles of sound monetary policy, then that may well call for a federal funds rate in the range of 5% to 8%."

Which is my point about the Fed rate needing to be above inflation especially when you are trying to control inflation.   
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jaichind
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Posts: 27,155
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Political Matrix
E: 9.03, S: -5.39

« Reply #19 on: May 05, 2022, 11:04:45 AM »

Market way down today as it dawned on investors that a slow rise in Fed fund rates means the party goes on longer but also means a much more aggressive rise in rates will most likely take place leading to an even bigger downturn.

At this stage the Fed's choices are

a) significant chance of a medium-sized recession in 2023

OR

b) Even bigger chance of a very large recession in 2024
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jaichind
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*****
Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #20 on: May 06, 2022, 12:10:50 PM »

Mohamed El-Erian, a closely followed bond-market strategist, says the Federal Reserve has a trust problem with financial markets and the nation over inflation by ruling out a 75 bp rate increase in the future.
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jaichind
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*****
Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #21 on: May 07, 2022, 05:27:20 AM »

For the first time since the Summer of 2019 the real 10-year treasury bond yield (yield minus inflation swaps for that same duration) turned positive.  I like to see that go up another 0.5%-0.7% to be in 2018 levels but this does seem to indicate that long-run projections pricing are beginning to move toward normal levels and the medium maturity bond rout is more than halfway done.  It is the short-term rates that are crazy low and there will be a lot more turmoil ahead as the Fed tries to avoid a large crash in the next couple of years.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #22 on: May 10, 2022, 12:10:19 PM »

https://www.marketwatch.com/story/fed-isnt-ruling-out-75-basis-point-moves-forever-mester-says-11652198364

"Fed isn’t ruling out 75 basis point moves forever, Mester says"

Markets that were up over 1% fell to negative territory on this news.  The Fed's communications on what they plan to do are terrible this cycle.

April YoY CPI numbers are coming out tomorrow which are expected to be 8.1% which is a drop from March YoY CPI numbers but that will be a base effect with MoM still expected to be positive.  I suspect the Fed is hedging itself in case the numbers end up worse than expected.
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jaichind
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Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #23 on: May 11, 2022, 07:31:26 AM »

April YoY CPI came in at 8.3% which is lower than March YoY CPI of 8.5% but higher than the expected 8.1%.  There will be somewhat more pressure on the Fed.
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jaichind
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*****
Posts: 27,155
United States


Political Matrix
E: 9.03, S: -5.39

« Reply #24 on: May 11, 2022, 07:46:34 AM »

US equities futures which were up over 1% before the CPI numbers came out all go wiped out when the CPI numbers came out.  It is now in negative territory and heading lower.

What is also interesting is that April chain CPI YoY was up 8.1% just March chain CPI YoY.  Last few months the "gap" between chain CPI and regular CPI was large which means that the price surge was more limited to a set of items that there were alternative products that could be used as substitutes.  The closing of the gap between chain CPI and regular CPI means that inflation pressure is now getting more across the board, at least in the goods area.  The Fed is running out of arguments like "the inflation surge is because of X, once X is out of the way things will be back to normal" as the price increase are becoming more broad-based and likely self-perpetuating.
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