Last week I chatted with Richard Bonugli and Europeans Godfrey Bloom and Claudio Grass. It is worth a listen — with your favorite libation, of course — as we moved from politics to the macro global picture in full. There was a great deal of discussion about the SNB with Claudio Grass and that is enough for all of us to drink.
Click here to listen to the podcast.
On Thursday, Treasury Secretary Janet Yellen was on CNBC in a prerecorded interview on Closing Bell, where she aligned herself in deeper with FEDERAL RESERVE Chairman Jerome Powell. Again, Secretary raised the issue that “we’re digging out of a deep hole in economy” while also noting “that the jobless rate, properly measured, is close to 10%.” Yellen also continued to maintain if ” inflation is a risk, the Fed has TOOLS to address it.”
The question remains: Secretary, what tools do you perceive the FED to have if unemployment is also at 10%, when properly measured? If you wish to get minority unemployment back to January 2020 levels what tools could curb inflation without increasing the unemployment of those at the lower levels of the jobs market?
This divergence is what keeps me looking for an official statement from the central bank about some form of Yield Curve Control. The Treasury/FED are attempting to balance their two mandates to achieve the policy outcomes that President Biden wants to achieve. Is closing the unemployment gap more important than inflation levels reaching 4% or more?
The FED has no tools to achieve this asymmetric economic outcome. Unless they pursue a curve flattening via YCC, raising rates in the traditional short-end would result in less employment unless there was also a massive government work program. Otherwise there is no way to square this circle. The 30-year Treasury bond is getting a free run as the FED does not purchase assets out that far and in a reverse form of limbo the question remains: How high can they go until they rock many asset classes?
This action is unprecedented because the Fed remains adamant about unemployment and yet the long bond yield rises as the MARKET attempts to force the FED to commit to fighting NON-TRANSITORY INFLATION. As Nixon’s economist Herb Stein would quip: “If something cannot go on forever, it will stop.” The world’s central banks have been on a coordinated mission to undermine the WILL of the market and its signaling mechanisms. We’re getting to crunch time as the 2/10 yield curve Thursday steepened to more than 120 basis points.
Historically, the only way to prevent a further steepening is to raise short-term rates. The implied rate on the February 2022 fed funds futures contract is NINE BASIS POINTS. I’m waiting to see what tools the FED has to slow inflation without slowing the economy? The 30-year bond is the lever moving the world.
The FOMC minutes Wednesday noted that in the intermeeting period “while the Chinese renminbi appreciated notably against the dollar as data showed a robust recovery in China.” But what is happening is the Chinese currency is appreciating in an attempt to aid Chinese imports of raw materials in an effort to raise input ever higher around the globe. This is disrupting the monetary stimulus efforts of the ECB, FED, BOJ, BOE, RBA, BOC. Yes, be careful of the inflation you so desperately desire. Just some food for thought.
Tags: Federal Reserve, inflation, Janet Yellen, Jerome Powell, U.S. yield curve, unemployment, yield curve control
February 18, 2021 at 9:02 pm |
Dear Janet and Jerome,
Pay no attention to lumber prices up 50% in the past month, and 100% over the past year. These are transitory, and would never impact lower income housing supply.
February 19, 2021 at 2:20 pm |
As of today, market inflation expectations (30 yr BE rate) are at 2.1, back to same levels as 2017/2018. Interestingly, this is occurring with the 30yr at 2.1, instead of 3.2 like in 2017/18. The reason, of course, is that real rates in 2017/18 were @1%, and now they are 0%. An economist will tell you if real rates are 0 then market is forecasting ZERO real growth over the foreseeable future.
If we assume this is correct, then look for the predominant Deflationary thesis to be tested in the 2.2-2.5 area over the next 6-12 months. Deflationistas will be arguing that fiscal support provides only one off growth effects, inflation expectations are still relatively contained, Commodity price craziness is Covid related S/D issues and not monetary, and that once the growth effects of the stimulus wear off, the predominant deflationary drag of the debt overhang will outweigh the fiscal stimulus and inflation will continue to drag lower.
I would expect the deflationistas to make a stand sometime this year around the 2.2.-2.5 levels.
Alternate thesis is that recent events have altered the probable course of future government stimulus from monetary to fiscal (aka Helicopter $$), bypassing the banks with every possible future recession being met with stimulus cash. If the latter is correct, 30yr should break the 2.2:2.5 level higher, likely with Real rates remaining near zero so inflation expectations begin ratcheting higher.
Although this would be the Fed’s preferred outcome, as Yra notes above this outcome is completely untenable, to lower 30yr rates you either raise ST rates inducing a recession (which just leads to more stimulus money and a vicious circle.) or you implement YCC. Fed thinks YCC is the panacea and will save them since it worked in the 50 & 60’s. Problem is, it will not because in the 50’s and 60’s stock of debt was Declining, today stock of debt is Increasing (and set to increase exponentially) KEY difference between now and then. YCC today would only lead to capital flight as one of the last harbingers of the free market becomes anesthetized.
February 20, 2021 at 6:50 pm |
Recoba,
So the great tug of war will only lead to the rope breaking.
Capital flight to where? If businesses around the globe still have to use dollars to fulfill contracts, pay taxes, there continues to be demand for theses little pieces of paper.
Now that they let the “stimulus check” genie out of the bag. If I were a betting man, I would wager low income people continue to receive checks and anyone making over $400,000 a year continue to get tax increases.Of course, we know the ultra wealthy will circumvent these taxes. We’re just getting rid of the fluff in between.
Recoba, thanks for posting. I think you’re correct about the 2.5 level.
As always, forever a student here.
February 20, 2021 at 8:36 pm |
Recoba—you have covered this extremely well.The most critical in my opinion is that the FED could flatten the curve by raising rates but then they run into the mandate of social justice and concern for the jobs of the most impacted by Covid–they wil attempt to jawbone this but right now the markets are holding their feet to the fire and as always this situation is not like any before regardless of what the academy says and don’t look to Japan for the situation was far different as the YEN was not the world’s reserve currency and the Japanese had huge savings to fall back on and of course the domestic bonds were 97% owned by domestic investors as they entered genuine DEFLATION
February 21, 2021 at 2:20 pm |
Pierre – Capital flight to hard assets and/or Asia but that it very far off into the future
Yra- Agreed. I always pondered how the free market would end up checkmating the Fed but the situation is gaining some clarity.
Also, it’s very interesting to me that so many important commodities (Gold, Silver, Steel, Copper, Aluminum) made important highs in 2011, important lows in 2016, and are now showing strength. What happened in 2011? Fed committed to ongoing QE instead of letting balance sheet runoff. What happened in 2016? Early 16′ was the start of the rate hike cycle; followed by Trump Victory in late 16′ (start of large fiscal stimulus). Now, we have a monetary repeat of 2011 but large fiscal stimulus, and markets seem to be indicating that the fiscal is more important. Not sure what it means, but if we get $20 copper Im gonna have to send some Yamazaki to Temple because that was just an unbelievable call.
February 21, 2021 at 3:44 pm |
Recoba—beautiful in all ways
February 21, 2021 at 5:58 pm |
Thank you for your reply, Recoba
February 22, 2021 at 10:14 am |
[…] as my friend Yra Harris aptly put it, what tools does the government have left in its toolbox to work on the ills that plague our […]