Covid struck in early 2020 and The Fed spiked the punchbowl with a massive surge in M2 Money. Like a storm surge.
Today’s unemployment report showed initial jobless claims and continuing jobless claims ALMOST at pre-Covid levels.
So it appears that The Fed’s job is done (under the assumption that The Fed had anything to do with the recovery).
So did The Fed almost violently overreact to the Covid crisis? The Atlanta Fed’s Raphael Bostic says it is too early to withdraw while St Louis Fed’s James “Bully” Bullard says it is time to taper.
Really Raph? 18.8% price growth is not enough for you?
What if inflation is actually transitory like The Federal Reserve has been saying? Or is The Fed really telling us about an impending economic slowdown after the Fed’s and Federal government stimulypto wears off?
Iron ore prices have slowed noticeably after peaking earlier this year. Lumber futures (random length) have crashed to pre-Covid levels.
On the other hand, food stuffs and raw industrials remain elevated, but the growth in price has stalled (see pink box).
President Biden, aka The Kabul Klutz, is now recommending tax increases as a result of the terrible jobs report from Friday. Rather than focus on The Fed’s monetary stimulus not working for the labor market.
The problem with fiscal stimulus is that the debt lasts forever but the GDP effects are short-lived. And The Fed is a crazy train.
Since the original model of The Federal Reserve was to purchase Treasuries and Agency MBS in an effort to push down interest rates, it will be quite difficult to delink the two: taper the balance sheet while not raising short-term rates.
(Bloomberg) — Bond investors may not wait long to start pushing back against Federal Reserve Chair Jerome Powell’s efforts to delink the start of asset-purchase tapering from the countdown to eventual policy-rate hikes.
Since Powell last week said the central bank could begin reducing its monthly bond buying this year, traders have stuck with early 2023 as the likely timing for the Fed’s liftoff from zero interest rates, and Treasury yields have barely budged.
But that calm faces a test starting Friday. The potential for volatility comes from the fact that when Fed officials gather this month, they will release fresh projections for the fed funds rate for the next few years. And with the labor market pivotal for Fed policy now, Friday’s August jobs report is seen as laying the foundation for these forecasts — collectively known as the dot plot — especially as some Fed officials have already been pushing for an early taper.
The upshot is that a robust reading Friday could have investors pulling forward tightening bets regardless of Powell’s efforts last week in his virtual speech at the Fed’s Jackson Hole symposium. The risk is traders will prepare for a repeat of June, when a hawkish signal via the dot-plot took markets by surprise and triggered an abrupt unwinding of wagers on a steeper yield curve.
If the employment report is “even deemed acceptable, regional presidents will be back on the tape in a flash,” sounding hawkish again, said Jim Vogel, an analyst at FHN Financial. “And you may have more officials penciling in a 2022 hike. And that would have to flatten the yield curve.”
Expectations for a hawkish shift would lift 5-year Treasury yields in particular, shrinking the gap with 30-year rates, Vogel said. That spread was around 114 basis points Wednesday, down from about 140 just before the Fed met in mid-June.
Dots Math
Officials’ June quarterly forecasts not only showed a median funds rate projection of two hikes in 2023 — after the March dot plot indicated no tightening until at least 2024 — but that seven participants saw at least one increase next year. This time around, it will take just three officials to raise their dots for 2022 for a full hike to be the new median for next year, assuming everyone else keeps their projections where they were.
Traders responded to the Fed’s June rate projections by driving 5-year yields up the most in almost four months. That was even as Powell said in his press conference that the dot plot should be taken with a “big grain of salt” and discussion about raising rates would be “highly premature.”
Powell last week said “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”
But the leadup to the Fed decision on Sept. 22 may culminate in a dot-plot unveiling that yet again presents a communication challenge for policy makers, as has been seen several times since the Fed introduced the projections in 2012.
“There’s information in the dots, and generally it’s good information,” said Shahid Ladha, head of Group-of-10 rates strategy for the Americas at BNP Paribas SA. It makes sense for the Fed, regarding tapering and rate hikes, “to try to separate them, but I don’t think they’ll be ultimately successful in separating them.”
Trouble Ahead
Even some Fed officials are wary of being able to disentangle the tapering from rate hikes, minutes from the July Fed meeting showed.
Kevin Flanagan, head of fixed-income strategy at WisdomTree Investments Inc., which runs exchange-traded funds with assets of $75 billion, sees trouble for the Fed.
His view is that the labor market will keep gaining ground in its rebound from the pandemic, and that the median September dot may show a hike in 2022. That bodes for higher yields, a flatter curve and makes floating-rate notes appealing, he said.
The median of economists’ projection is for a gain of 725,000 jobs in August, a slowdown from June and July but well above the average for 2021. Of course, with millions still out of work relative to pre-pandemic levels, the Fed may prove to take longer to lift rates than traders expect, especially given the central bank’s “broad and inclusive” maximum-employment goal. But the market may be about to challenge that approach.
Note: Yesterday’s ADP jobs gain was forecast to be 625k jobs added in August, but only 374k jobs were actually added.
Fed Faces ‘Ugly Fight’ Over Jobs Goal in Next Big Policy Debate
“We are going to be all of a sudden talking about rate hikes potentially next year, and that is where the focus of the bond market is going to go,” Flanagan said. “The dot plot will be the Fed’s initial message for its forward guidance on rates. And then it will begin to come from Fedspeak — which is when the rubber will really meet the road.”
And with the stock market, particularly technology stocks, rising with Fed asset purchases, I wonder if The Fed forecasts that assets prices will keep going if they withdraw the punch bowl?
Let’s see if Powell and The Gang can forecast the stock market if they taper the balance sheet and raise rates.
Home prices are now growing at 4.75x hourly earnings growth. And existing home sales inventory remains low by historic standards.
All of the Case-Shiller metro areas were above 13% with Phoenix, AZ leading at 29.3% YoY. The slowest growing metro area is Chicago, IL at 13.3%.
The FHFA’s house price growth hit 17.38% YoY in June. Mortgage rates being low and Fed’s Balance Sheet and The Fed’s System Open Market Holdings sky-high.
Are Fed Chair Jerome Powell and The Fed Board of Governors the Gods of Hellfire?
The minutes of the July Fed meeting suggest officials may signal an impending start to asset purchase tapering at the September gathering — provided jobs numbers remain on track in the interim — and make an announcement in November.
Rising infections counts have not spurred an uptick in new jobless claims. High-frequency data show some customers are shying away from eating out, but the overall impact on restaurant reservations is limited. The bigger challenge for many companies is retaining and hiring enough workers to meet strong demand, evident in low layoff counts and persistent mention of labor shortages.
In other words, IFF Covid doesn’t cause further economic damage (or governments don’t shut down economies), then The Fed will consider a mild taper of their balance sheet.
But as of this morning, The Fed’s reverse repo facility keeps on rising along with The Fed’s balance sheet. At least M2 Money Supply growth has leveled off.
That should result in an increase in Treasury yields and mortgage rates, all things being equal. And assuming the Biden Administration and governors don’t panic and go into economic lockdown … again.
The US Treasury curves since the Covid recession of 2020 have shown optimism in recovery … then reality dawned.
Well, it looks like The Fed will start tapering after all.
Initial jobless claims fell again to 348K and continuing jobless claims fell to 2,820K.
Unless Biden’s disastrous Afghanistan withdrawal sends shock waves through the global economy (or Covid Delta/Lamba variant strains get worse and hurt the economy), we should see The Fed start tapering their balance sheet.
The 10Y Treasury yield rose slightly on the jobs report.
The Tapir, the symbolic mascot of The Fed’s tapering programs.
Well, economists were expecting a 7.2% YoY print of the Producer Price Index – Final Demand. But July’s print came in hot … at +7.8% YoY. Compare that with the Core Consumer Price Index YoY of +4.3%.
The month-over-month PPI Final Demand is showing a run rate of 12%! (1% in July x 12 months).
US inflation remains nears its highest level since 1991, but moderated slightly.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July on a seasonally adjusted basis after rising 0.9 percent in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.4 percent before seasonal adjustment.
The indexes for shelter, food, energy, and new vehicles all increased in July and contributed to the monthly all items seasonally adjusted increase. The food index increased 0.7 percent in July as five of the major grocery store food group indexes rose, and the food away from home index increased 0.8 percent. The energy index rose 1.6 percent in July, as the gasoline index increased 2.4 percent and other energy component indexes also rose.
US Real Average Hourly Earning YoY “rose” to -1.2% as core inflation “moderated” to +4.3%, the second highest reading since 1991.
Core inflation remains at 1991 levels.
With core CPI growing at 4.3%, the baseline Taylor Rule model implies that the Fed Funds target rate should be 7.05%, not the current rate of 0.25%.
As The Fed keeps rolling the dice on zero-interest rate policies.
Confounded Interest - Anthony B. Sanders 
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