I yet another effort to understand where are going with the FED and their so-called NEUTRAL RATE, FRA hosted a podcast with Darius Dale of 42 Macro. It entertains themes familiar to readers of NOTES FROM UNDERGROUND as yield curves and currencies provide the backdrop for a great part of the analysis. We also discussed the next vote of the FOMC to see if the newest GOVERNORS finally find their voice and begin elevating their research into policy. Lisa Cook and Philip Jefferson are well known labor economists that Professor Jason Furman called the most dovish appointees in decades, and yet we have not heard a discouraging word from the FED neophytes.
The sounds of Bullard, Daly and Evans are growing stale as they were the ones pushing QE and lower for longer rates that proved the undoing of the worst forecast ever: transitory inflation. I wonder if Powell’s ridiculous statement on the NEUTRAL fed funds rate being 2.25%-2.5% stemmed from some quiet dissension from the new sitting GOVERNORS. On Tuesday, there was a rapid rise in yields in the short end of the curve as San Francisco Fed President Mary Daly et al expounded on the need for more aggressive tightening to curb inflation.
I also posit that the rise in rates may have been in response to a note published Monday night by Zoltan Pozsar, titled War and Interest Rates. The piece covers our favorite topic: global political economy. It is worth reading at least twice. A key takeaway is that Pozsar maintains that we need to take Powell at his word about his will to fight inflation and that the “risk of the FED hiking to 5or 6% is very real, and ditto the risk of rates cresting there despite economic and asset price pain.” If Pozsar is correct … well, do the math.
Click here to listen to the recording.
Tags: Federal Reserve, Jerome Powell, Lisa Cook, neutral rate, Philip Jefferson, US yield curve
August 3, 2022 at 8:07 pm |
I haven’t had a chance to read “War and Interest Rates”, but will do. I did take bets on T-BIlls 1 month contracts beginning in May 2022, rolling contracts over 4 times. Which was a mistake, what if Powell dropped everything to 0. Now, I’ll do just month to month. Powell wanted to see rates at 3-3.5% for 2022, then 2023 3.5-4%. Rates at 5-6% would nice on a monthly T-Bill.
Thank you for your time and effort.
August 4, 2022 at 8:35 am |
Raising rates to 5 or 6 % which Pozsar says is a real possibility, I would maintain is not correct. Look at the repercussions that would occur, with total US debt that has been weaned on Zero rates for a good part of the decade . Zombie corporations would quickly disappear. The housing market would collapse. The US national budget would have require some serious surgery cutting to the bone.
Maybe all this would be good in the long run, but a Greatest Depression would result with Global debt/GDP at over 300%. Which politician or Fed Chairman would want to be remembered for that? Herbert Hoover is still cited as the Bogeyman almost a century later.
August 4, 2022 at 9:24 am |
Asherz—I think Zoltan would agree with you but the lens he uses a geopolitical for this one and certainly the issue of Powell trying to regain his stature which is evidently important for him for why else want to be reappointed having done such a poor job—one of the issues as to why i wish to hear more from Lisa Cook and Phillip Jefferson so as to make your case
August 4, 2022 at 3:11 pm |
Rising Interest Rates: Economic and Policy Implications
(Congressional Research Service)
https://crsreports.congress.gov/product/pdf/IN/IN11979
August 10, 2022 at 4:23 am |
Transitioning to Stagflation (BRIDGEWATER)
https://www.bridgewater.com/research-and-insights/an-update-from-our-cios-transitioning-to-stagflation
August 11, 2022 at 2:42 pm |
Arthur–thanks you so very much for all you do to enhance the knowledge base on NOTES—really appreciate this
August 6, 2022 at 11:07 am |
I agree with Asherz that the US cannot tolerate that “high” of a Fed funds rate given its high debt:gdp ratio, according to the public opinion of others I trust such as Mr Gromen (below). Already the US in a technical recession with only modestly higher interest rates that remain highly negative in real terms, but less so than in the UK and Europe, which has boosted the dollar (relatively) to levels that are economically painful to some.
According to the always brilliant Luke Gromen (who often refers to others as “always brilliant”), even early in the spring he publicly claimed that Yellen was intent on raising the USD dxy to 110 to intentionally break emerging markets, specifically the enemy Russia and China. But we now know how that backfired as Russia’s currency & revenue actually rose, China was relatively stable, the US fell into recession even as runaway inflation surged, and the countries hurt most by Yellen’s scheme were US “allies” in Europe, UK and Japan.
In July, Mr Gromen publicly explained that as a result of Yellen’s dollar scheme that backfired, rumors were afoot for the US to print many new dollars (and hide most of it as they can/do via creative accounting), with which to buy European and Japanese gov’t bonds (which is legal to do in the US) to help stabilize those faltering currencies and economies. Perhaps this is already being discounted by the market.
Mr Gromen suggested Japan is privately requesting this of the US or else Japan will be forced to switch sides to Russia and buy its heavily discounted gas & oil in order to remain nominally solvent, in view of Japan’s yield control policy and enormous bill for energy imports that together have raised yen “printing” and seriously pressured the yen and Japan’s economy.
Either way, all else equal, this should become negative for the dollar and positive for the yen, Japan, gold, industrials, and risk assets more broadly, at least in nominal terms. Have we recently began to already see a change in trend, or only a reactive counter rally?