Calamity Jay Powell Ditches Transitory Inflation Tag, Paves Way for Rate Hike (Compare To Volcker’s Record)

Calamity Jay Powell is no longer mentioning “transitory” when it comes to inflation, but does Powell and the FOMC have the moxie to ACTUALLY raise rates more than a smidge??

(Bloomberg) — Team Transitory is throwing in the towel.

In a clear sign that the Federal Reserve is shifting to tighter monetary policy, Jerome Powell — who’s spent months arguing that the pandemic surge in inflation was largely due to transitory forces — told Congress on Tuesday that it’s  “probably a good time to retire that word.”

The Fed chair, tapped last week for another four-year term, still thinks inflation will ebb next year.

But in testimony before the Senate Banking Committee, he acknowledged that it’s proving more powerful and persistent than expected, and said the Fed will consider ending its asset purchases earlier than planned.

A number of economists are forecasting cooling inflation next year, which gives Powell an excuse to NOT raise rates, other than just a bit.

For a little history, inflation was rampant in the 1970s and early 1980s. Fed Chair Paul Volcker, all 6’7 of him, raised the Fed Funds target rate (white line) to 20% on several occasions. The result? Inflation cooled from over 14% in 1980 to 2.46% by 1983. But since 2008, Fed Chairs Bernanke, Yellen and Powell have been the ANTI-Volckers … keeping the Fed Funds Target rate near zero for the the most part and adopted their gut-wrenching quantitative easing programs that are still here today.

Of course, Powell could do what Volcker did (and the Taylor Rule suggests) and raise their target rate to 15% to cool inflation.

But does Powell and the other FOMC members have the moxie to really cool inflation? Frankly, no. Powell until yesterday played the TRANSITORY card and still believes that inflation will cool by 2022.

True, the Federal government has binged on borrowing (up 172% since January 2009). And with Biden and Congress trying to spend trillions more (much of which will be added to the public debt rolls, so increasing interest rates ala Volcker is very problematic.

And then there is always the good ‘ole excuse not to raise rates if needed. Other than admitting that The Fed is monetizing Federal government spending to which there is no end in sight.

Given Fauci’s alleged strong belief in “science” he could play Esqueleto in a remake of Nacho Libre.

Calamity Jay? Powell Weighs Faster Tapering of Bond Buys Amid High Inflation (Market Pukes, Dow Drops 500 Points, West Texas Crude Drops 6.56%)

Calamity Jay Powell testified in front of the US Senate Banking Committee. He rattled markets by going hawkish about inflation, then gave The Fed an out by playing the COVID CARD (the latest Omicron Variant). Aka, the DEATH CARD.

Federal Reserve Chair Jerome Powell said the strong U.S. economy and elevated inflation could warrant ending the central bank’s asset purchases sooner than planned next year, though the new omicron strain of Covid-19 poses a fresh risk to the outlook.

“It is appropriate, I think, for us to discuss at out next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” Powell said Tuesday. “In those two weeks we are going to get more data and learn more about the new variant.”

Powell made the comment in response to questions during a Senate Banking Committee hearing in Washington. The Fed is currently scheduled to complete its asset-purchase program in mid-2022 under a plan announced at the start of November; policy makers next meet Dec. 14-15, where they could make a decision to accelerate the tapering.

On his remarks, the stock market puked.

Well, if Powell followed the Taylor Rule, he would really scare Congress with raising The Fed Funds Target Rate to 14.94% based on an inflation rate of 6.20%.

And then we have HOUSE price inflation of near 20%. But The Fed doesn’t consider than inflation.

Then we have oil prices retreating -4.59%. Not, not due to Biden releasing the National Petroleum Reserve (NPR). Rather it is FEAR of The Fed raising rates and a corresponding slowdown in economic growth.

Calamity Jay Powell.

Bitcoin Retreats 20% From All-Time High as Risk Assets Slump (Dow Retreats Almost 1,000 Points, Gold Advances)

It has been a grim Friday. The Dow fell 900 points, 10Y Treasury yields fell 16.1 basis points and West Texas Crude fell to $68.17.

Bitcoin tumbled 20% from record highs notched earlier this month as a new variant of the coronavirus spurred traders to dump risk assets across the globe.

The world’s largest cryptocurrency fell as much as 8.9% to $53,624 on Friday during London trading hours. Ethereum, the second-largest digital currency, dropped more than 12%, while the wider Bloomberg Galaxy Crypto Index declined as much as 7.5%.  On the other hand, gold rose as cryptos fell, then retreated as cryptos rebounded.

A new variant identified in southern Africa spurred liquidations across markets, with European stocks falling the most since July and emerging markets also slumping.

The Dow is down around 900 points … and look at Europe!

The 10-year Treasury yield is down 16.1 basis points. Most of Europe is down around 8-9 basis points while the UK is down 14.5 BPS.

And West Texas Intermediate crude futures are down to 68.17 from 78.39. No Jen Paski, this isn’t due to Cousin Eddie (Biden) releasing the Strategic Petroleum Reserve (SPR).

Maybe it was all the tryptophan released by eating turkey.

A day to remember.

Treasuries Curve Flattens Sharply After Data Dump, Fed Minutes (Market Update)

Its Thanksgiving in the USA! Confession: I don’t like turkey. Prime rib with horseradish sauce? You bet!!

Anyway, Treasuries ended mixed Wednesday with the yield curve sharply flatter after a raft of U.S. economic data and minutes of the November FOMC meeting bolstered expectations for an earlier start to Fed rate increases. Two- and 5-year yields reached YTD highs, and 5s30s spread reached narrowest since March 2020. 

Over the past week, the Treasury actives curve rose 13.85 basis points at the 2 year tenor.

Yields ended richer by ~6bp across long-end of the curve, while front-end cheapened almost 3bp; 2s10s flattened more than 5bp, 5s30s more than 6bp; 10-year yields shed ~3bp to ~1.635%
Release of Nov. 2-3 FOMC meeting minutes drew minimal market reaction, as flatter curve held its shape.

The US Dollar Swaps curve rose from the previous week as well.

Minutes said participants considered elevated inflation as likely transitory, “but judged that inflation pressures could take longer to subside than they had previously assessed”

Earlier, front-end and belly sold off after a heavy slate of U.S. economic data including the lowest initial jobless claims tally since 1969

Also during U.S. morning, Fed’s Daly said she would support accelerated tapering of asset purchases, which added to pressure across front-end Treasuries

Subsequently, eurodollars traded heavy over the session as rate-hike premium continued to ramp up in 2022 and 2023; overnight index swaps showed 30% chance of a March hike, while around three hikes — or 75bp — were priced in by the end of next year

Wishing you a happy Thanksgiving! In my dreams!

Biden Picks Powell Over Brainard, 10-Year Treasury Yields Rise (10Y-3M Treasury Curve Rose From 83 BPS At End Of 2020 To 160 BPS Today)

President Biden nominated Jerome Powell for a second term as Fed Chair and nominated Lael Brainard as Deputy Chair to replace Richard Clarida. The US House of Overlords (aka, the US Senate) will hold hearings on the nominees (with Elizabeth Warren opposing Powell and supporting Brainard’s nomination).

Treasury yields jumped and U.S. index futures signaled a continued selloff in technology shares as traders pruned bets for a dovish-for-longer Federal Reserve after the renomination of Jerome Powell as its chair.

Contracts on the Nasdaq 100 Index fell 0.3% after Monday’s last-hour selloff in technology stocks. The subgroup was the worst performer in Europe Tuesday, sending the region’s benchmark to a three-week low. A currency crisis deepened in Turkey, with the lira weakening past 13 per U.S. dollar. Zoom Video Communications Inc. lost 9% in premarket trading on slowing growth.

Investors are reducing expectations for a deeper dovish stance by the Fed after Powell was selected for a second term. The chair himself sought to strike a balance in his policy approach saying the central bank would use tools at its disposal to support the economy as well as to prevent inflation from becoming entrenched. 

Fed rate hike premium is added after Powell confirmed as next Fed Chair:

Change in Fed’s interest-rate target implied by overnight index swaps and eurodollar futures.

Fed Bank of Atlanta President Raphael Bostic said Monday the U.S. central bank may need to speed up the removal of monetary stimulus and allow for an earlier-than-planned increase in interest rates.

Translation: Markets are pricing in MORE hawkish Powell over uber-dove Brainard. The 10-year Treasury yield has risen from 1.52% to 1.65%

And the 10Y-3M Treasury curve has risen from 83 basis points at the beginning of 2021 to 160 basis points today. I will this the Biden Inflation Effect (BIE).

Let’s see if Powell & Company deliver on removing the excessive stimulus from the market, particularly with midterm elections approaching.

Agita! Treasury Secretary Yellen Expresses Openness to Defusing Debt Ceiling Without GOP Votes (CDS At $15.97, So No One Is Really Worried, Janet!)

Somewhere over the Alps, T-Sec Janet Yellen is fearmongering over a possible US debt default if Republicans don’t kowtow to Democrat’s desires to raise the debt ceiling.

(Washington ComPost) — SOMEWHERE OVER THE ALPS — Treasury Secretary Janet Yellen on Sunday said Democrats should be willing to approve a fix to the nation’s debt ceiling without GOP support if necessary, an approach senior Democrats ruled out during a recent standoff over the issue.

In an interview aboard a government airplane between Rome and Dublin, Yellen castigated Republicans for refusing to help raise the debt limit but acknowledged Democrats may be able to address the issue without GOP support through the Senate budget procedure known as reconciliation.

Senior Democratic leaders were adamant that the debt ceiling be resolved on a bipartisan basis last month. Senate Republicans have uniformly insisted that Democrats should alone be responsible for raising the nation’s debt limit. Congress probably will face a deadline of Dec. 3 to act, though the exact date is uncertain.

Well, Janet, the market (Credit Default Swaps for US) doesn’t seem to be worried about raising the debt ceiling.

Likewise, the CDX 5Y IG for the US investment grade corporate bonds is near historic lows. Even Yellen can’t make that rise.

The yield curve is flattening as The Fed gets ready to taper.

Only a career academic and politico Bambina like Janet Yellen would try to drum up agita about a US debt default when Democrats can cram down most anything through “budget reconciliation.”

Just relax Janet, put on some headphones, and listen to Redd Volkaert instead of your habit of fearmongering.