The Fed Giveth, The Fed Taketh Away

With the stock market tanking and the Federal Reserve finally starting to raise interest rates and reduce its $9 trillion balance sheet, it's probably a good time to look back and determine how much of the stock market's gains in the past 12 years or so have been built on extremely accommodative Fed monetary policy. That could provide some idea of how much we can expect the market to drop once the Fed has finally stopped the tightening process, and when stocks might start rising again.

Since reaching its all-time high of 16,057 back on November 15, the NASDAQ had dropped nearly 29% as of May 18, when it closed at 11,418. Likewise, the S&P 500 is down nearly 18% since it hit its all-time high on December 27, while the Dow is off more than 13% after reaching its peak on that same day.

Those declines followed several indications from Fed Chair Jerome Powell and other Fed officials that the central bank had finally conceded that inflation wasn't "transitory" after all and that it had to act aggressively before inflation got totally out of control.

The Fed raised its benchmark interest rate by 25 basis points on March 16, its first rate increase since December 2018, and another 50 bps on May 4, its largest increase since May 2000. The Fed's next meeting is scheduled for the middle of next month, at which it is expected to vote for another 50-bp hike, followed by several more by the end of the year. If the Fed raises rates by 50 bps at each of its next five meetings, including the one right before Election Day, that will push its benchmark rate to Continue reading "The Fed Giveth, The Fed Taketh Away"

Is The Housing Bubble The Next To Burst?

With stock prices cratering and bond yields soaring, it’s a fair question to ask if the housing bubble is about to burst, too. After all, home prices have skyrocketed in recent years thanks to artificially low-interest rates engineered by the Federal Reserve, which has kept mortgage rates well below historic levels ever since the 2008 global financial crisis, even well under 4% for most of the past three years. But with the average rate on a 30-year fixed-rate mortgage now at more than 5% and climbing, is the home price boom still sustainable?

According to the National Association of Realtors, the median price of a single-family home has jumped by over $100,000, or more than 39%, to $382,000 in March from $274,000 in 2019. The median principal and interest payment has increased by nearly 50%, to $1,502 from $1,054 three years ago, while the percentage of monthly income the typical mortgage payment eats up has risen to more than 20% from less than 16% in 2019. Likewise, the group’s affordability index, which measures whether a typical family earns enough to qualify for a mortgage, has dropped to 124.0 from nearly 160. While the NAR says the median family income has increased more than 10% to $89,321 from $80,808 during that time, the amount of income needed to qualify for a mortgage to buy a median-priced home has jumped by more than 40%, to more than $72,000.

Now, these NAR figures are as of March, when the average rate on a 30-year mortgage was 4.24%. Since then, that figure has risen by more than 100 basis points, to more than 5.25%.
So, is this a bubble ripe for the popping? Continue reading "Is The Housing Bubble The Next To Burst?"

Let's Get Serious

Federal Reserve Chair Jerome Powell indicated strongly last week that the Fed will likely raise interest rates by 50 basis points at its next meeting on May 3-4. It will likely get more aggressive in its fight against 8%-plus inflation. It’s going to have to because just as fast as the Fed is trying to bail water out of the boat, the White House and Congress are determined to keep pouring it in.

“It is appropriate in my view to be moving a little more quickly” to raise rates than the Fed has recently, Powell said last Thursday at an International Monetary Fund event. “Fifty basis points will be on the table for the May meeting,” he said. That would double the 25-basis point increase at its March meeting, which now looks relatively puny compared to the yield on the 10-year Treasury, which is rapidly approaching a three-handle for the first time since 2018.

St. Louis Fed president James Bullard, suddenly the most hawkish voting member on the Fed’s monetary policy committee, said he thinks a 75-basis point hike is more appropriate. However, he conceded that “more than 50 basis points is not my base case at this point.” Still, 50 bps is a lot better than 25 bps in bringing the Fed’s target closer to the so-called neutral rate, which is when Fed policy is neither accommodative nor restrictive, and the Fed is nowhere near that (although no one really knows what the magic number is). With six more meetings to go this year, including May’s, 50 bps at each meeting would push the fed funds rate above 3%.

That seems awfully aggressive, given the Powell Fed’s generally dovish inclinations. Still, it may have no choice given that Continue reading "Let's Get Serious"

Fighting The Eternal Fire

The Federal Reserve’s vaunted independence, which we heard so much about during the Trump Administration but very little so far under President Biden, will be put to the test this year as it battles 1980s-style inflation during an election year. Will the Fed fight vigorously to fight inflation that now totals an annualized 8.5% according to the March consumer price index, as it now insists it will, or will it suddenly wimp out just before November 8 if it senses that raising interest rates to the point of recession is a cure worse than the inflation disease?

Needless to say, the Fed is just as guilty as the fiscal authorities for creating runaway inflation, no, we can only blame some of this on Vladimir Putin. Since the 2008 global financial crisis, with just a couple of short, minor pauses, the Fed has kept interest rates artificially low and pumped trillions of dollars into the economy long after any emergency justified it doing so. Now, finally, the Fed has come to the realization that monetary accommodation has gone on too far and too long and is now ready to tap on the brakes. It’s already begun the interest rate raising process and will soon start reducing “at a rapid pace” its $9 trillion balance sheet, according to Fed Vice Chair designate and current Fed Governor Lael Brainard.

“It is of paramount importance to get inflation down,” the formerly dovish Brainard said recently at a Minneapolis Fed conference. Continue reading "Fighting The Eternal Fire"

Now It Begins, But How Will It End?

As expected, the Federal Reserve raised its target interest rate by 25 basis points last Wednesday, as Fed Chair Jerome Powell said two weeks ago that it would do. What was surprising was that the Fed also telegraphed that it plans to raise rates six more times this year, to at least 1.75% by the end of this year, and four times next year, with fed funds ending at around 2.75% by the end of 2023.

That was a lot more aggressive than some observers, including this one, had expected. Yet the market seemed happy with it. After a brief initial sell-off, stocks soon resumed their upward path, apparently because they liked the certainty it provided, at least for now, as well as the gradual nature of the Fed’s schedule.

But how certain can we be? Will the Fed really carry through with this, or will it revert to its easy-money ways? And even if it does do what it says it plans to do, will it be enough to get inflation under control while at the same time avoiding pushing the economy into recession?

We’ll have to wait and see. Continue reading "Now It Begins, But How Will It End?"