How crazy was The Federal Reserve’s overreaction to the government shutdowns surrounding the Covid epidemic? While most analysts talk about California, I am going to discuss … Cleveland Ohio as an example of how The Fed can destroy markets.
The Case-Shiller home price index for Cleveland rose 31.5% since January 2020 just before The Fed unleashed its massive monetary stimulus on an unsuspecting city.
But as The Fed starts to tighten monetary policy after Yellen’s too loose for too long policies followed by Powell, foreclosure rates are soaring in Cleveland. In fact, according to Attom Data, 5 of the top 10 zip codes with the worst foreclosure rates in May 2022 were in Cleveland.
Of course, Cleveland is much like much of the rust belt (except Columbus Ohio). The rust belt is losing population along with heavy tax states like New York and Illinois. Destination states? Texas, Florida, the Carolinas and Tennessee.
Then at the national level, Atlanta Fed’s GDPNow real-time tracker fell to 0% growth.
US Treasury Secretary and former Federal Reserve Chain, Janet Yellen, admitted on ABC’s This Week that US inflation is “unacceptably high”and prices are likely to stick with consumers through 2022, and that the US economy is likely to slow down.
“We’ve had high inflation so far this year, and that locks in higher inflation for the rest of the year,” she said Sunday on ABC’s “This Week.”
“I expect the economy to slow,” she said, adding: “But I don’t think a recession at all inevitable.”
US inflation accelerated to 8.6% in May, a fresh 40-year high that signals price pressures are becoming entrenched in the economy. Those figures dashed any hope that inflation was starting to ebb, prompting the Federal Reserve to unleash its biggest interest-rate increase since 1994.
Hey, I thought strangling the US mortgage market and housing markets was supposed to cool the inflation rate, Janet.
On the good news/bad news front, cryptocurrency Bitcoin fell to $17,600 earlier today before rebounding to above $20,000 as the expectation of further Fed rate increases diminished (Yellen admitted the economy is slowing).
Yellen ignored rising mortgage rates which is putting a chokehold on the US housing market.
Hey Janet! So you are admitting that Biden’s energy policies AND massive Congressional spending bills ARE helping to drive prices through the roof and that Fed rate increases won’t tame the savage inflation beast?
Even since the housing bubble burst and ensuing financial crisis on 2007-2008, The Federal Reserve under Ben “The Savior!” Bernanke, Janet Yellen and Jerome Powell let their zero/low interest rate policies be too low for too long that anyone with common sense knew would lead to serious problems when The Fed was forced (this time by inflation) to end the massive OVER monetary stimulus. We are now living through The Great Reset of the US economy.
Since Biden was sworn-in as President (or El Presidente) in January 2021, 30-year mortgage rates are up 108% to 6%, regular gasoline prices are up 108% to $5 a gallon nationally. Inflation is up to 8.6% YoY.
Bernanke, Yellen and Powell did not follow any rule per se, just a “seat of the pants” panic button approach. Using the Mankiw specification of the Taylor Rule model, the Fed Funds target rate should be 13.25% based on CORE PCE. Notice starting in 2014, The TR suggested target rate started to be higher than the actual Fed target rate. And since the Covid monetary blast of 2020, the gap between the Taylor Rule and Fed target rate (red area) has grown to near the highest level in history. Even now Mohamed A. El-Erian, Chief Economic Advisor at Allianz, is starting to admit that The Fed’s ZIRP policies are beginning to hurt.
But if we use total inflation rather than core inflation, the measure that picks up the actual pain that Americans are feeling from rising gasoline prices and mortgage rate, we get a Fed Target rate of 22.10%. Since The Fed’s current target rate is only 1.75%, The Fed has “Room To Move.”
And in a painful. bad way.
Bernanke, Yellen and Powell must think that The Taylor Rule is the New Jersey ham pork roll.
As The Federal Reserve tightens the monetary noose (Fed Chair Powell said Fed ‘acutely focused’ on returning inflation to 2%), the US economy is slowing. In fact, May’s Industrial Production report is half of what was expected. Industrial production declined to 0.20% MoM versus the expected 0.4%. At the same time, capacity utilization rose slightly to 79%., but still below expectations.
Mortgage rates are rising rapidly, but the growth has cooled slightly as the economy cools.
Bitcoin is getting demolished by The Fed’s reaction to inflation.
And “It’s Not Always Sunny In Philadelphia.” Since the Philadelphia Fed’s Business General Conditions has dropped into negative territory with, among other things, The Fed’s monetary tightening. And they’ve only just begun (no Carpenters’ songs!).
Sometimes I wonder if The Federal Reserve Board of Governors pays attention to economic news. For example, the Atlanta Fed’s GDPNow forecast for Q2 was released today at -0.002%. So what does The Fed do? They raised their target rate by 75 basis points to 1.75%.
Apparently, The Fed has chosen to fight inflation rather than help the economy.
Remember peeps, The Fed still have its staggering monetary stimulypto in place.
The Fed is signaling its withdrawal of stimulus, causing mortgage rates to soar.
Given the slowdown of the US and global economy, we shall see if The Fed keeps to its tightening plans. As of today, the market is expecting The Fed to raise its target rate from 1% to 3.819% by February 2023. That is a 291% increase in The Fed’s target rate.ng