Fed Comes A Little Bit Closer To Taylor Rule (Raises Target Rate To 1.75% While TR Rudebusch Calls For 6.62% — Only 447 Basis Points To Go!)

Yes, Jay (Powell) and the Americans (FOMC) came a little bit closer to The Taylor Rule (Rudebusch Model) with the FOMC voting to increase their target rate to 1.75%. The lower bound is now 1.50%.


The Taylor Rule (Rudebusch Model) calls for a Fed Funds Target rate of 6.62%. Only 447 basis points left to go, Jay!


The sentiment for 4 rate hikes in 2018 is growing.


The Fed Dots Plot for today’s meeting shows optimism over economic growth.


I was hoping that Jay Powell was going to sing a ballad to former Fed Chair Janet Yellen.


Born To Run! Libor Rises for 30th Straight Day Ahead of Fed Decision (Highest Since Financial Crisis)

With a rate increase a foregone conclusion when the Federal Reserve concludes its two-day policy meeting on Wednesday, traders have been actively pricing it in. The three-month U.S. dollar London interbank offered rate, or Libor, which is one of the benchmarks for setting borrowing rates worldwide, has been on the rise since Feb. 7, reaching 2.25 percent, the highest since 2008 (and the financial crisis).


Meanwhile, its gap over similar-maturity risk-free rates, known as the Libor-OIS spread, has more than doubled since the end of January to 55 basis points, a level unseen since 2009.


With The Fed taking its foot off the monetary brakes (at long last), Libor and the Libor-OIS are “born to run.” UP!

Here is my friend, Atlanta Fed’s President Raphael Bostic, and Fed Chair Jerome Powell.


Fed Enters Brave New Forecasting World Beset With Same Old Data (Actual data look very similar to those Fed faced in December)

The Fed’s Open Market Committee (FOMC) is meeting today and tomorrow to decide what to do. Well, it is pretty much a foregone conclusion that the Fed Funds Target Rate (upper bound) will be raised to 1.75% from 1.50%.


But what is different at this meeting than at the last meeting in 2017? In short, GDP is expected to growth at a faster pace and inflation is rising ever so slowly.

(Bloomberg) -By Jeanna Smialek- Federal Reserve officials will face an unusual predicament as they update their economic projections this week: Everything has changed but the data.

In many ways, it feels like a brave new world. Chairman Jerome Powell makes his debut with an expected interest-rate increase, replacing Janet Yellen. Financial conditions have tightened and the five rate increases under Yellen since December 2015 are finally being felt in the real economy, at least in mortgage rates. Tax reform has passed and Congress is lifting government spending caps, boosting the near-term growth outlook.

Yet Fed officials swear by their data dependence, and the numbers look strikingly similar to when the policy-setting committee last met. The inflation pickup officials have been waiting for still hasn’t materialized, wages are ticking higher but hardly surging, economic growth is chugging along and the job market continues to pull people off the sidelines.


And if we look at the Rudebusch Model for the Taylor Rule, it is screaming for a Fed rate hike even with unemployment rate at 4.1% and Core PCE Inflation at 1.52%.


While The Fed forecasts GDP to grow at 2.5%,


the Atlanta Fed’s GDPNow Forecast for Q1 has fallen to 1.8%. Be warned! This is one noisy forecast model!!


Home prices keep growing at over twice that of hourly wage growth.


Part of The Fed’s Brave New World is trying to cope with housing prices rising over twice as fast as wage growth.



Double Whammy! 10-year Treasury Bid-to-cover Ratio Lowest Since ’09 As Treasury Borrowing Increases And Fed Tightens

Based on the number of bids that investors submitted versus the amount sold, average demand for 10-year notes has fallen to the lowest since October 2009. (Bid-to-cover  compares the volume of securities that dealers enter bids for to the volume offered for sale).


Treasury supply is further exacerbating what should be a natural move away from the market as interest rates climb.

The yield on benchmark 10-year Treasuries has already risen around half a percentage point this year and was at 2.89 percent as of 7:30 a.m. Thursday in New York.

The government’s financing needs have already started to grow. As a result of the Trump administration’s tax cuts (not to mention the staggering budget deficits under The Bush and Obama Administrations), the deficit is set to widen and reach almost $1 trillion next fiscal year. The shortfall is on top of the almost $21 trillion of debt the U.S. already owes, more than any other country. (Roughly 70 percent of that total is in the form of Treasuries.)


Excluding short-term bills, the U.S. government plans to borrow $62 billion at debt auctions this week by offering Treasuries due in 3, 10 and 30 years. The total is about $6 billion more than auctions of the same maturities in January. The first batch of enlarged sales last month were “noticeably worse” by most measures, Simons said.
Economists have questioned the value of Trump’s debt-financed tax cuts this far into the post-crisis economic cycle, in part because the stimulus is a departure from prevailing theory and the norm in recent decades. Borrowing has tended to decrease when the Fed is raising rates, and vice versa.

And with Fed officials projecting three rate increases this year, the opposite is poised to happen in 2018.


This “double whammy” of Fed tightening and Treasury increased borrowing is not likely to go away anytime soon as Treasury issuance increases and The Fed continues to normalize monetary policy.

The next 10-year auction is today at 1pm. Let’s see if Whammy is still pitching.