Put Your Money Where Your Mouth Is

George Yacik - INO.com Contributor - Fed & Interest Rates


Last week Federal Reserve Governor Jerome Powell joined the chorus of prominent industry leaders and government officials calling for reform of the American housing finance system, namely by reducing the government’s role in the business and bringing in more private capital.

Some questioned why Powell should speak on this subject, given that – as he told his American Enterprise Institute audience –the Fed “is not charged with designing or evaluating proposals for housing finance reform.” Still, he pointed out, “we are responsible for regulating and supervising banking institutions to ensure their safety and soundness, and more broadly for the stability of the financial system.” Besides, he noted, he was expressing his own personal views on the subject, not necessarily the Feds.

But what caught the attention of a lot of people, including myself, was the sense of urgency for reform that Powell claimed existed. Continue reading "Put Your Money Where Your Mouth Is"

Should We Believe The 'Transitory' Story?

George Yacik - INO.com Contributor - Fed & Interest Rates


The bond market may have stopped listening to the Federal Reserve, but that doesn't mean we shouldn't know what the voting members of its monetary policy committee are thinking. What's clear is that they're not as united as they were at their last meeting just two weeks ago, when they voted nearly unanimously to raise interest rates by 25 basis points, with only Minneapolis Fed President Neel Kashkari voting against.

Now, no sooner was the vote cast, but it appears that it at least one member, maybe two, have misgivings about voting for the increase. At the very least, they're not as much in a hurry to raise rates again soon, if not until the end of this year, if not even later.

Still, as you would expect – or hope for – in a body of intelligent people, there's a strong difference of opinion on what the Fed should do next as it concerns interest rates. Continue reading "Should We Believe The 'Transitory' Story?"

Janet From Another Planet

George Yacik - INO.com Contributor - Fed & Interest Rates


For most of the past 10 years the financial markets have been led if not actually directed by the all-knowing, all-seeing Federal Reserve. But over the past year or so the roles have changed, or at least the markets have basically stopped listening to the Fed.

Case in point: Last week the Fed, largely as expected, voted 8-to-1 to raise short-term interest rates by another 25 basis points; Minneapolis Fed President Neel Kashkari, who wanted to keep rates unchanged, was the lone dissenter. The Fed has now raised its benchmark federal funds rate three times since last December.

Normally, that move should have induced long-term rates – which are set by traders and investors in the bond market, not the Fed – to rise, too. But that hasn’t happened. In fact, long-term rates have gone in the other direction, falling to their lowest levels since last November, to the point where the yield curve – the difference between short-term and long-term rates – has flattened out to a point we haven’t seen in years.

Last week the yield on the U.S. Treasury’s benchmark 10-year note ended at 2.15%, which is down nearly 50 basis points from a recent high of 2.63% three months ago. Over that same period, the yield on the three-month T-bill has risen by about 25 bps, from 0.75% to 1.01%. That means the difference between the two has been cut to about 115 bps from 188 bps in just three months.

Why the disconnect between what the Fed is doing, and thinks is happening, and what the bond market perceives is really happening? Continue reading "Janet From Another Planet"

The Odds Of A Fed Rate Hike In June Just Got Smaller

George Yacik - INO.com Contributor - Fed & Interest Rates


Still think the Federal Reserve will raise interest rates at its monetary policy meeting next week? Last Friday’s jobs report for May should make you rethink that notion. But it’s not the only reason.

Prior to the release of the report – which showed that the economy added just 138,000 jobs last month, nearly 50,000 below expectations, while the previous two months were revised downward by 66,000– the market consensus called for the Fed to raise rates by 25 basis points at its June 13-14 meeting. That doesn’t seem like such a sure thing anymore.

After its last meeting on May 2-3, when it took no action on rates largely because of a weaker-than-expected economy in the first quarter, the Fed said it expected the slowdown was “likely to be transitory.” Now, however, we have a pretty substantial body of evidence that indicate fairly strongly, if not consistently, that the slowdown has continued well into the second quarter. Continue reading "The Odds Of A Fed Rate Hike In June Just Got Smaller"

Time For The Fed To Take It Easy

Lior Alkalay - INO.com Contributor


The Fed’s June rate decision is coming up this week and the consensus bets are overwhelmingly tilting towards a rate hike. According to the CBOE Fed Funds rate probability chart, the probability the Fed will raise rates at the next meeting is 91.3%. Thus, suggesting that market participants are almost certain a rate hike is coming. Furthermore, there is also growing consensus that the Fed will also start trimming its balance sheet as early September. However, a deep dive into the mechanics of the US economy suggests that the Fed should ignore the consensus, and even its own outlook, and take a step back from tightening. And it all starts with the puzzling discrepancy between inflation and housing prices.

Home Prices Heat as Inflation Cools

Upon the surface, the latest fall in the US Core inflation rate, from 2.3%, four months ago to 1.9%, and the latest surge in US housing prices (as reflected by the Case-Shiller Index) present a somewhat puzzling divergence between the US inflation outlook and housing prices. Nonetheless, those two contradicting developments are closely intertwined, both to each other and to the Fed’s monetary policy. And, to illustrate the link between the two, we must dive into the US Treasury market. Continue reading "Time For The Fed To Take It Easy"