Mission Impossible! How The Fed Can Get To Their 2% Target? Taylor Rule Suggests Raising The Target Rate To … 22%!

I scratch my head when I here Fed talking heads discuss how to get inflation back down to 2%.

Of course, the easiest way is to 1) remove Biden’s anti-fossil fuel executive orders that limit the supply of crude oil and natural gas, but that isn’t going to happen. 2) stop Federal spending, but Manchin and Sienma enabled Biden/Schumer/Pelosi’s “drunken sailors in port” spending sprees, so Federal spending is likely to not be stopped. 3) raise taxes (Larry Summer’s suggestion) to cool-off demand. And give MORE money our Federal government? No thanks. 4) raise The Fed target rate to 22%.

Yes, the Taylor Rule suggests a target rate of … 22% to tame the savage inflation beast, based on 8.50% CPI YoY.

The problem, of course, is that 22% is higher than the previous high of 20% under Fed Chair Paul Volcker in 1981. And Volcker didn’t have the Bernanke Bonanza (aka, quantitative easing). Look at the monetary stimulypto, since 1981 and particularly since Covid.

Will The Fed raise rates to 22%? Well, Fed Futures is pointing at the target rate hitting 3.6% by March 2023, then falling again.

Its mission impossible to get to 22%, particularly since Biden/Schumer/Pelosi won’t cool it on Federal spending.

US Producer Price Index Cools To 9.8% YoY In July As M2 Money Growth Cools And Recession Probability Increases

Somehow I doubt if Biden, Harris and Jean-Pierre (Biden’s Press Secretary) will go on the talk show circuit talking about the Producer Price Index Final Demand at 9.8% YoY, meaning that inflation is still raging.

But the curious thing about the PPI Final Demand numbers. While lower than June’s reading of 11.3% YoY, it also coincides with declining gasoline prices and declining growth in M2 Money stock. Which is still growing at 5.9% YoY. The probability of recession is rising (even though technically the US is in recession after 2 consecutive quarters of negative GDP growth.

Here is the more striking chart.

So is the US “improving” on prices because of brilliant Biden strategies (I just laughed at my own “bon mot”)? Or are prices (PPI, gasoline) slowing because of declining demand as the US slips into recession?

Lawrence Summers was once again in the news saying that the way to cool inflation is to raises taxes (and cool demand). Only a true Statist would say something like that. Larry, how about Biden and Congress stop spending so much money that is helping to fuel inflation?

One Washington DC types would rest their hopes on cooling inflation by having the US slip into recession AND raises taxes.

Biden looking for a way out.

US July Inflation Remains Hot (CPI At 8.5% YoY) While Real Weekly Wage Growth Remains Burned (-3.6% YoY) Mortgage Refi Apps Down -82% YoY While Mortgage Purchase Apps Down -19% YoY)

The US July inflation report remains hot, hot, hot! While mortgage purchase and refinancing applications are not, not, not.

The US consumer price index rose 8.5% in July. And real average weekly growth remains burned by horrid inflation, at -3.6% YoY.

Source of inflation?

Headline inflation above estimates in 14 of last 16 months.

Data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 5, 2022 revealed that … the Refinance Index increased 4 percent from the previous week and was 82 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 19 percent lower than the same week one year ago.

Mortgage applications are NOT hot, hot, hot.

Labor Blues! US Labor Productivity Declines -4.6% In Q2 As Unit Labor Costs Sizzles At 10.8% (Fed Balance Sheet Still Out In Force)

Labor Blues!

US labor productivity declined in Q2, down -4.6% since Q1. At the same time, unit labor costs continue to soar at a rate of 10.8%.

You can see that The Federal Reserve has begun to SLOWLY reduce it balance sheet.

Somehow, I don’t think Biden’s team will be discussing today’s news, other than report that “It’s A Beautiful Day Today.”

Pushin’ Too Hard? US Treasury Yield Curve Inverts To -45 Basis Points (Most Inverted Since 2000) Despite Senate Passing “Inflation Reduction” Boondoggle

Is The Federal Reserve pushin’ too hard on raising their target rate?

The US Treasury 10Y-2Y yield curve descended further into inversion, signaling impending recession.

The US unemployment rate (U-3) tends to be the lowest when the 10Y-2Y yield curve inverts, then explodes when recession strikes.

The spread between the Bankrate 30-year mortgage rate and the Bankrate 5/1 ARM rate widened to 139 basis points.

This is happening as The Fed is expected to keep raising their target rate (yellow line) and the US Senate passed its massive “inflation reduction” boondoggle that is expected to NOT reduce inflation, but raise taxes on the middle class and low-wage workers.

Simply Unaffordable! Gap Between Real Home Price Growth (+11.17% YoY) And Real Wage Growth (-2.15% YoY) Near Highest Since 1988 (REAL 30Y Mortgage Rate Is Now -3.23%)

The US housing market is simply unaffordable for millions of Americans. To illustrate the problem, here is a chart of the Case-Shiller National home price index less CPI YoY graphed against Average Hourly Wages less CPI YoY.

The gap between the REAL national home price index YoY and REAL US average hourly earnings YoY is near the largest since 1988. Inflation is making matters far worse since REAL average hourly earnings growth continues to decline.

The only thing positive to say is that REAL home price growth YoY is lower now than at the peak of the 2005 home price bubble that burst catastrophically.

Another “positive” is that the REAL 30-year mortgage rate has fallen to -3.23%. At the peak of the house price bubble in June 2005, the REAL 30-year mortgage rate was +2.58%. THAT is one big difference between the pre-2008 recession and today’s impending recession.

Weekend Update! US Treasury Yield Curve Inversion Worsens Screaming Impending Recession, 30Y Mortgage Rate Rises To 5.6% (5/1 ARM Rate Rises To 4.21%)

Here is your weekend update on Treasury and Mortgage markets.

The current US Treasury 10Y-2Y yield curve just slipped further into reversion at -40.299 basis points, screaming impending recession. Oddly, The Federal Reserve has been leaving its balance sheet of Agency Mortgage-backed Securities (MBS) in tact (green line).

On the mortgage front, Bankrate’s 30-year mortgage rate index rose to 5.60% while the affordability-friendly 5/1 Adjustable Rate Mortgage (ARM) rate rose to 4.21%.

Currently, a 5/1 ARM borrower can save 139 basis points over the traditional 30-year mortgage rate.

Have a wonderful weekend!

US 10-year Treasury Yield Surges +14 Basis Points As Strange Jobs Report Spurs Fed Rate Hike Fears

Today’s jobs report was … strange. While the US economy added more jobs than expected, we also saw labor force participation contract and real wage growth decline again.

The reaction in the bond market? US Treasury 10-year yields exploded by +14 basis points. As I used to tell my fixed-income students, any basis point jump or decline of 10 basis points or more is a BIG DEAL.

The implied target rate for The Fed (based on Fed Funds Futures) is now lower for the Jan 1, 2024 FOMC meeting (3.025%) than it is for the Sept 21, 2022 FOMC meeting (3.034%).

Mortgage rates? They will go up as The Fed removes its Brawndo, the economy mutilator.

‘Sizzling’ US Jobs Data (+528k) Make Case for Bigger Fed Rate Increases (Real Avg Hourly Earnings Growth Sinks To -3.8173 And US Treasury Yield Curve Inverts Further To -37.6, Most Inverted Since 2000)

The media is thrilled with today’s jobs report showing a sizzling 528k jobs added to the US economy. And with that, the media is cheering that recession fears are shrinking.

But hold on a second.

First, while 528k jobs were added in July (great news!), REAL average hourly earnings growth YoY fell to -3.8173. Why? Because the rate of inflation is greater than nominal average hourly earnings YoY of 5.2%. That is BAD.

This charts shows that inflation-adjusted (or real) wage growth is the worst in recorded history.

And the “sizzling” jobs report isn’t feeling any love in the bond market where the US Treasury yield curve (10Y-2Y) deepened its inversion to -37.593 basis points, a drop of -1.331 BPS. Note that the 10Y-2Y curve falls below 0% just prior to every recession.

Labor force participation actually fell to 62.1% from 62.2% in June.

I am assuming that The Fed will misread the jobs report and argue for LESS COWBELL.

US 30Y Mortgage Rates On Rise Again, Bankrate 30Y Rate UP 92% Under Biden/Powell (US Yield Curve Inversion Worsens, Worst Inversion Since 2000)

After mortgage rates topped 6%, they settled back down with the global economic slowdown, but are on the rise again.

Bankrate’s 30-year mortgage rate index rose to 5.57% after rising above 6% in June 2022. Mortgage rates are up 92% under the team of Biden and Fed Chair Powell as The Fed tries to extinguish the inflation fire cause by 1) excessive Fed stimulus, 2) Biden’s anti-fossil fuel policies and 3) Biden/Congress’ reckless spending.

The Fed still has not shrunk its balance sheet yet and home price growth is still soaring.

The US Treasury 10Y-2Y yield curve inversion just worsened to -38.503, the most inverted since 2000.

Over the longer-term, the US Treasury 10Y-2Y yield curve is the most inverted since 2000. Remember, the 10Y-2Y yield curve inverts prior to a recession.

In terms of putting out the inflation fire, The Fed is acting more like The Three Stooges.