Wu-Xia employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. It can be used to summarize the macroeconomic effects of unconventional monetary policy (ZIRP + QE). The Shadow Rate is now -1.7021%.
And you wonder why we have inflation and house prices going into orbit?
With inflation also going into orbit, we see that breakeven 10 year inflation rate rising above the 5Y5Y (nominal forward 5 years minus US inflation-linked bonds forward 5 years). In other words, the US has abnormally high inflation and is expected to grow and NOT be transitory.
The Shadow knows … that the US is hyperstimulated. And inflation isn’t going away anytime soon.
How insanely overstimulated in the US economy by The Federal Reserve? Today’s red-hot inflation report of 6.2% YoY implies a Fed Funds Target rate of … 14.94%!! According to the Taylor Rule model, The Fed Funds Target rate should be almost 15%.
If we use CORE inflation (that is, CPI less food and energy), The Fed’s Target rate should be “only” 11.10%.
I feel like I am watching re-runs of Gilligan’s Island with Biden as the Skipper and Powell as Gilligan. Thurston Howell III and his wife lovey are the US Congress and Janet Yellen is the Professor. Case in point? REAL average hourly earnings YoY fell to -1.2% under the Gilligan’s Island leadership in DC.
Biden Starts To Freak Out About Soaring Inflation, Orders Economic Council To “Reduce Energy Costs”
From The Land of 1,000 Excuses, The Federal Reserve Open Market Committee (FOMC) will announce … no rate increases and a slight reduction in their assets purchases (Treasuries and Agency MBS). The announcement will be at 2pm EST (not at The Midnight Hour).
The Federal Open Market Committee is all but certain to hold rates near zero after a two-day policy meeting and announce a $15 billion monthly reduction in bond buying from the current $120 billion pace, judging that the test for tapering has been met as the economy heals from Covid-19.
There are two rate increases baked into the Fed Funds futures data as of today.
But a troubling aspect of The Fed’s monetary policy is that M2 Money Velocity is near the lowest in history and The Fed has been binge printing. What this means is that money printing has had little impact on GDP growth.
When The Fed mentions the post-COVID recovery, I hope they mention that REAL hourly wage growth is NEGATIVE.
And REAL S&P 500 earnings yield is also negative.
The Fed will likely to blame TRANSITORY effects such as the backed-up port traffic in Long Beach for rising prices rather than their flooding the markets with too much money.
But The Fed will continue to print, even though they will blame bottlenecks for inflation rather than their haphazard drowning of the economy in money.
Given that The Fed is monetizing the reckless spending by The Federal government, particularly Pelosi’s latest budget, we will see coordination between Chairman Powell and Treasury Secretary Janet Yellen (aka, Mustang Sally).
Call Jerome at 634-5789 to tell him to raise rate to normal levels.
Ethererum, the cryptocurrency, is now at $4,298. It under $200 as the Covid crisis took shape in March 2020. Since Covid, The Federal Reserve went loco and massively increased their money supply and asset purchases. With that response (and economic bottlenecks), inflation has increased to 5.4% YoY.
The Fed’s new moto should be “Policy errors ARE our business!”
No, we don’t look to President Beavis to do much of anything positive about inflation.
Despite the staggering and unorthodox monetary stimulus from The Federal Reserve, US real GDP continues to fall. The Q3 real GDP report is out and real GDP QoQ fell to 2%. Not surprising given that the Atlanta Fed’s GDPNow tracker is at a dismal 0.195% and falling.
The culprit? Personal consumption fell to 1.6% in Q3 after hitting 12% in Q2.
The GDP price index actually declined slightly from 6.1% to 5.7%.
Of course, Bloomberg blames the decline in GDP on supply constraints … which were created by The Fed and Federal government dumping trillions of dollars of stimulus. While the monetary stimulus is still raging, Federal government stimulus has worn out. To paraphrase BB King, “The fiscal stimulus is gone.”
Yes, The Federal Reserve and the Federal government reacted insanely to the Covid crisis and created a total mess (including ill-advised government lockdowns of the economy, stimulus to households who already were employed, etc.)
Bloomberg News headline of “U.S. Posts Weakest Growth of Pandemic Recovery on Supply Woes” misses the point that The Fed and Federal Reserve CAUSED the supply woes. It reminds me of an episode from the British comedy series “Blackadder” with Rowan Atkinson, Hugh Laurie and Stephen Fry.
General Melchett: [explaining why they can’t rescue Captain Blackadder] Now George, you remember when I came down to visit you when you were a nipper, for your sixth birthday? You used to have a lovely little rabbit, beautiful little thing, do you remember?
Lieutenant George: Flossie.
General Melchett: That’s right, Flossie! Do you remember what happened to Flossie?
Lieutenant George: You shot him.
General Melchett: That’s right! It was the kindest thing to do after he’d been run over by that car.
Lieutenant George: By *your* car, sir.
General Melchett: Yes, by my car. But that, too, was an act of mercy when you remember that that dog had been set on him.
Lieutenant George: *Your* dog, sir.
General Melchett: Yes, yes, my dog. But what I’m trying to say, George, is that the state young Flossie was in after we’d scraped him off my front tyre, is very much the state that young Blackadder will be in now: if not very nearly dead, then very actually dead!
Federal Reserve Chair Jerome Powell sounded a note of heightened concern over persistently high inflation as he made clear that the central bank will begin tapering its bond purchases shortly but remain patient on raising interest rates.
“The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation,” Powell said Friday during a virtual panel discussion hosted by the South African Reserve Bank and moderated by Bloomberg’s Francine Lacqua.
“I would say our policy is well-positioned to manage a range of plausible outcomes,” he said. “I do think it’s time to taper and I don’t think it’s time to raise rates.”
Good luck with that, Jay! You are going to raise the short-end of the yield that will lead to a flattening of the Treasury yield curve. But you are going to continue to buy Treasuries and Agency MBS in order to monetize the rampant spending by Congress and the Biden Administration? C’mon man!
You can see where Powell spoke today. It is when gold tanked along with the 10-year Treasury yield. Both rebounded a bit, but the 10-year Treasury yield continue its fall to 1.6324%.
The US dollar (green) fell when Powell opened his pie-hole. But Bitcoin (blue) fell in advance as if they knew what Powell was going to say.
I have no idea why Jack Dorsey tweeted “705742.” But I do know that Bitcoin hit 63,982.92 this morning as the US 10Y-3M curve has been steepening.
Since the 3-month Treasury yield has been repressed to near zero, the 10Y-3M curve is pointing to rising 10-year yields. Which likely means that 30-year mortgage rates will be rising too.
UPDATE! Bitcoin hits 66,615 as Proshares Bitcoin Strategy E rises as well.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is 0.5percent on October 19, down from 1.2 percent on October 15. After recent releases from the US Census Bureau and the Federal Reserve Board of Governors, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth decreased from 0.9 percent and 10.6 percent, respectively, to 0.4 percent and 8.4 percent, respectively.
US real GDP nosedived to 0.5% according to the Atlanta Fed GDPNow real-time tracker.
Again, The Fed and Federal government pumped trillions of stimulus into an unprepared economy resulting in massive bottlenecks. So, we are getting declining GDP and rising inflation.
Yesterday’s industrial production dove leading to the 0.5% GDP figure. Today’s housing starts didn’t impact GDP in a meaningful way.
Confounded Interest - Anthony B. Sanders 
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