Fed’s Jerome Powell is watching how low interest rates will go.
Despite Chairman Powell’s claims that the US will never go negative, The Fed Funds Futures rates are signaling YES.
Negative interests rates are appearing in US Treasury Strips (both coupon and principal strips).
The short-end of the Treasury curve is flirting with negative yields while the TIPs curve is profoundly negative beyond 3 years.
How low will interest rates go?
Given the reaction of The Federal Reserve to the Covid-19 virus, it is understandable for investors to freak-out about possible Weimar Republic / Venezuela-like hyperinflation.
(Bloomberg) — Even a calamity of disease, death and economic destruction afflicting the world all at once isn’t enough to suppress the notion in some quarters that inflation could return with a vengeance.
The coronavirus crisis has killed hundreds of thousands, incapacitated millions and affected the livelihoods of billions — prompting policy makers to fear a deflation spiral reminiscent of the Great Depression. But economists including former Bank of England official Charles Goodhart, and investors such as BNP Paribas Asset Management, are asking if a different phenomenon lurks in the wreckage of global growth.
Muted Price Growth
IMF predictions for inflation rate at end of 2021
Yes, inflation rates are muted in the short-run, but the surge in government spending and The Fed balance sheet is scaring some people about “inevitable” hyperinflation.
And the surge in M2 Money Supply YoY is leading some to panic.
But like the Titanic that sank after striking an iceberg in calm seas, there are calm seas on the inflation front. The EUR Inflation Swap Forward 5Y5Y is less than 1%.
The USD Inflation Swap Forward 5Y5Y rate is 1.7944%.
But USD Swaption volatility remains calm after a jolt upwards in March.
And the US Treasury Inflation Indexed curve is negative beyond 3 years.
So, the data is showing calm inflation seas, not gut-wrenching Venezuelan-like inflation.
The G-7 Central Banks have gone wild lowering their target rates and increasing balance sheet purchases.
The US “inflation” numbers for March
Despite fears of runaway, Jimmy Carter-style inflation, core inflation actually fell to 2.1% YoY.
One of the culprits? Declining airline fares and lodging away from home (courtesy of MacroMarkets). This is similar to the post 9-11 recession issues.
The US Inflation Swap Forward 5Y5Y is only 1.9160%.
And Treasury Inflation Protection Securities (TIPS) continue to have negative yields.
Of course, no country does inflation like Venezuela and Argentina!
Is The Fed turning liquidity into cottage cheese?