The inflation that is crushing Americans is due to energy and food price increases. That is, the non-core inflation. Under Biden, food is up 63%, gasoline is up 92% and diesel prices are up 112%. But The Fed doesn’t consider food and energy prices, per se.
If we look at the Taylor Rule considering fighting inflation including food and energy, The Fed would have to raise their target rate to … 21.38%.
Now, The Fed can clearly cool-off the housing market by raising rates. In fact, my fear is that they go too far and crash the housing market. The Fed will NEVER get to 20% again like we last saw under Volcker in 1981. 20% rates certainly cooled home prices back then and Fed rate hikes helped crash the housing market in 2008.
So, when The Fed says they want to be the inflation-fightin’ Fed, we must be aware what The Fed can and cannot do. They can’t tame the inflation beast in the form of food and energy prices (unless they crash the economy), but they can crush home prices.
Well, the Fed’s talking heads have been saying a 50 basis point hike was coming in May … and it appeared!
And it looks like 9 rate hikes are a comin’ by February 2023.
The Fed’s Dot Plots shows a cooling of Fed rate hikes by 2024 and beyond.
Here is the path of Balance Sheet peel-off.
The US Treasury actives curve is up by 14 bps at the 10-year tenor and up 17 bps at the 2-year tenor.
The plan will see $30 billion of Treasuries and $17.5 billion on mortgage-backed securities roll off. After three months, the cap for Treasuries will increase to $60 billion and $35 billion for mortgages.
I could read the Fed’s speech on their decision, but since The Fed has been so highly politicized, I don’t really care what they say. Only what they do.
Here is the ratio of the S&P 500 index against the Bloomberg Commodity Price Index. This ratio is plotted against The Federal Reserve’s balance sheet of assets. Notice the decline in the Commodity Ratio in 2022, even ahead of the Russian invasion of Ukraine.
Global currencies, on the other hand, have been really crushed since the Russian invasion of Ukraine. The Japanese Yen, China’s Renminbi and Europe’s Euro relative to the US Dollar are falling due to a variety of reasons. Covid lockdown in China, Japan’s insistence on monetary easing while other Central Banks are tightening and the Euro with Russia threatening nuclear war.
WTI Crude is back to $100 a barrel. Critical metals are down today related to a slowing global economy and wheat is up 2.75%.
Could it be that US Dollar hegemony is nearly over and commodity-backed currencies are the way of the future?
The Federal Reserve’s two goals of price stability and maximum sustainable employment are known collectively as the “dual mandate.” Unfortunately, inflation is running away (bad) from employment gains (good). Sort of like “The Good, The Bad and The Ugly.” But just the Good and The Ugly combine to create the Misery Index.
Here is the Atlanta Fed’s CORE flexible CPI YoY for March. The good news? Flexible Core CPI YoY was a little lower than the historic high reading in February. The bad news? We are still talking about 21.82%+ rise in prices (down from 23.56% in February).
If I use the Atlanta Fed’s flexible consumer price CORE index combined with the U-3 unemployment rate, we see that March’s inflation report plus U-3 unemployment is generating a misery index that was last seen in July 2008 during The Great Recession. Unless we consider the July 2021 reading of 31.3%, so we have seen two horrible misery index readings under Biden.
If we look at the Misery Index since 1967, we now have the GOAT (Greatest of All-time) Misery.
Now, inflation under Presidents Ford and Carter (red line) were higher than the flexible core price index (blue line) in the 1970s and 1980. But flexible core price CPI YoY is substantially higher than March’s CPI growth of 8.5%.
The bottom line is that inflation losses are far outweighing the employment gains, resulting in elevated misery.
The US Producer Price Index (PPI) final demand rose 10% YoY in February, further evidence of spiraling inflation under Biden/Pelosi/Schumer’s reign of error.
And speaking of Senate Majority Leader Chuck Schumer (D-NY), the Empire State Manufacturing Survey (General Business Conditions) crashed to -11.8.
And Russia is losing the economic demolition derby with Ukraine (at least for sovereign debt).
I am still trying to figure out what House Speaker Nancy Pelosi (D-San Francisco) meant by “When we’re having this discussion, it’s important to dispel some of those who say, well it’s the government spending. No, it isn’t. The government spending is doing the exact reverse, reducing the national debt. It is not inflationary.”
Here is a chart of Federal government outlays and inflation. Massive expenditures and growth in Federal debt and the resulting inflation. Nancy?
In August 1979, when Paul Volcker became chairman of the Federal Reserve Board, the annual average inflation rate in the United States was 11%. Inflation peaked in 1980 at 14.6%. Volcker raised the federal funds rate from 11.2% in 1979 to 20% in June of 1981.
Inflation (defined as CPI YoY) declined from over 14.6% in 1980 to 3.6% by 1985. But 30-year mortgage rates resumed their upward trajectory and peaking in October 1981 at 18.63 before beginning a gradual decline as inflation was tamed.
But will Powell enact another Volcker moment by raising the target rate abruptly?
The bank is joining others on Wall Street in ramping up bets for faster policy tightening, after U.S. consumer prices posted the biggest jump since 1982 in January. Goldman Sachs Group Inc. is forecasting seven hikes this year, up from its earlier prediction of five.
“We now look for the Fed to hike 25bp at each of the next nine meetings, with the policy rate approaching a neutral stance by early next year,” the JPMorgan team, led by chief economist Bruce Kasman, said in a research note.
January U.S. inflation readings “surprised materially to the upside,” the economists wrote. “We now no longer see deceleration from last quarter’s near-record pace.”
On inflation, the economists said a “feedback loop” may be taking hold between strong growth, cost pressures, and private sector behavior that will continue even as the intensity of current price pressures in the energy sector eventually fade.
Strong growth? 1.3% is strong growth??
Be that as it may, the US economy is at a different place today than under President Jimmy Carter. When Volcker started raising The Fed Funds Target rate, US public debt was still under $1 trillion. It has ballooned to over $30 trillion today.
9 rate increases is above what is being priced in The Fed Funds FUTURES market which is 6 rate increases over the coming year.
With 7.5% inflation, the Taylor Rule suggests a target rate of 15.45%. Talk about “Shock and Awful!”
We are starting to see GOLD (gold) surging and Bitcoin (yellow) falling as The Fed prepares “shock and awful” rate hikes and Biden continues to beat the war drums over Russia invading Ukraine.
If The Fed actually raises rates 9 times and dramatically pares back its massive monetary stimulus, it will be “shock and awful.”
How bad is inflation in the USA? Try 18%, based on the Flexible Consumer Price Index.
The Flexible Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively frequently. Because flexible prices are quick to change, it assumes that when these prices are set, they incorporate less of an expectation about future inflation.
Again, remember that Federal inflation numbers woefully undercount housing and rent inflation. For example, the Case-Shiller National Home Price index (as of November 2021) was growing at 18.8%.
The sad part is that inflation-adjusted average hourly earnings growth of all employees is crashing thanks to inflation.
Like John Belushi from The Blues Brothers, Fed Chair Jerome Powell is saying that the markets lackluster response in terms of bond yields to his “hawkish” announcement yesterday “isn’t his fault.”
(Bloomberg)Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.
While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored.
“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said.
This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.”
Or it could be that no one REALLY believes that Central Banks will ever cut interest rates, despite surging inflation.
The US Treasury 10-year yield dropped 7 basis points overnight and remains just south of 1.50%. The Eurozone remains below 1% (with Germany at -0.358% and France at -0.009% at the 10-year mark). Japan is at 0.039%. This is what Powell means by low global rates keeping US long-term rates down.
The 10-year Treasury term premium (measured before Powell’s head fake on raising rates) has returned to pre-Biden levels.
Meanwhile, global equities futures are up across the board (well, except for Mexico).
The Fed could have raised their target rate if they were REALLY interested in cooling inflation. The Taylor Rule remains at 14.94% while The Fed is stalled at 0.25%. Even if you don’t like the Taylor Rule, it still highlights how ridiculous Fed Stimulypto is.
Well, we do have a government-propelled economic recovery, but at a cost of declining REAL wages thanks to the highest inflation rate in 40 years.