What's The Right 'Neutral' Interest Rate?

Will last Friday’s August jobs report showing that wages rose nearly 3% compared to a year ago finally convince the Federal Reserve that inflation really is starting to pick up steam? If not, what exactly will it take?

That report was certainly good news for workers, who have waited a long time – since 2009, apparently – to see their wages rise by so much. But it also provides convincing evidence that 2% inflation – which the Fed has been trying to stoke for the past 10 years – has finally arrived. But will the Fed actually believe it and do something before it “overheats,” to use its word?

A hike in the federal funds rate to 2.25% at the Fed’s September 25-26 monetary policy seems like it’s already baked in the cake. But it’s still not a given that another one will happen at the December meeting. According to CME’s Market Watch tool, the odds of a rate hike at the yearend confab are only 72%, compared to more than 98% for this month’s meeting. (While the Fed does meet in early November – just a day after the “most important election in our nation’s history,” if you believe some of the political pundits – a rate change then is very unlikely. The Fed has indicated that it will only adjust rates at a meeting that ends with a press conference by the Fed chair. That pretty much disqualifies November).

After the jobs report was released, the yield on the two-year Treasury note hit 2.70%, its highest level in more than 10 years. The benchmark 10-year note closed last week at 2.94%, its highest point in over a month. That those rates didn’t go even higher seems to indicate that the market isn’t yet sold on two more rate increases this year.

At least one member of the Fed is. Continue reading "What's The Right 'Neutral' Interest Rate?"

Don't Buy The Low Inflation Story

Federal Reserve Chair Jerome Powell sent investors home happy for the weekend last Friday when he outlined a fairly balanced plan of interest rate increases designed to fight inflation while avoiding throwing the economy off track. Nevertheless, some economists at the Fed itself appear to believe that the central bank may not be taking the threat of inflation seriously enough.

In his prepared remarks for his speech at the Kansas City Fed’s annual policy symposium in Jackson Hole, Wyoming, Friday, Powell indicated that he’s not overly worried about rising inflation, or at least not enough to be more aggressive about raising rates to avoid piercing a hole in the economic balloon just as it’s starting to expand.

“While inflation has recently moved up near 2%, we have seen no clear sign of an acceleration above 2%, and there does not seem to be an elevated risk of overheating,” the Fed chair said. Moreover, he said the Fed has to balance “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating. I see the current path of gradually raising interest rates as the approach to taking seriously both of these risks.”

That was enough to push the S&P 500 to its first record close since January 26 and the yield on the benchmark 10-year Treasury note to 2.81%, which is down about 20 basis points from its recent peak of 3.00% at the beginning of this month. Continue reading "Don't Buy The Low Inflation Story"

Dimon Says: Get ready for 5% 10-year yield

If you don’t believe me, believe Jamie Dimon.

“I think rates should be 4% today,” the JPMorgan Chase CEO said this week, referring to the yield on the benchmark 10-year Treasury note. And if that wasn’t strong enough, he added, “you better be prepared to deal with rates 5% or higher — it's a higher probability than most people think.”

The question shouldn’t be, “Is he right?” Instead, it should be: “Why aren’t rates that high already?”

The 10-year yield ended last week at 2.95%, about unchanged from the previous week, although it did cross over into 3.0% territory for about a day before falling back. It started this week at 2.93% -- after Dimon made his comments.

Just about every Federal Reserve comment and economic and supply-and-demand figure screams that the yield on the 10-year should be at least 100 basis points higher than it is today. Yet the yield remains stubbornly at or below 3%. Continue reading "Dimon Says: Get ready for 5% 10-year yield"

Should The Fed Be Above Criticism?

I suppose it was just a matter of time, but Trump Derangement Syndrome (TDS) finally hit the bond market last week.

According to some experts, last week’s nearly 10 basis point jump in long-term Treasury bond yields was at least partially due to the president’s unprecedented and impertinent statement that he didn’t like the fact that the Federal Reserve was raising interest rates.

For the past two years, the financial markets have been an island of blissful ignorance, totally disregarding all of the nonsense swirling around the White House, whether real or invented. The S&P 500 has risen about 30% since Donald Trump’s election despite all of the clouds hanging over his presidency, from alleged collusion with the Russians to the Paul Manafort thing to Stormy Daniels to surrendering American sovereignty to Vladimir Putin.

But now apparently the president has finally stepped in it deep enough to rattle the markets.

Last week the yield on the benchmark 10-year Treasury note rose seven basis points to close the week just below 2.90%, its highest weekly close in a month. The yield on the 30-year bond jumped 10 bps to 3.03%, its highest level since June 26. According to the Wall Street Journal, some of that rise was due to Trump’s comments about Fed policy, neglecting to mention that the yield on the 10-year German government note – the European benchmark – was also up sharply last week, up nine bps on the week to 0.37%, its highest level since June 20.

So what did Trump say about the Fed that was so disturbing that it led some bondholders and traders to dump Treasury bonds and German Bunds? Continue reading "Should The Fed Be Above Criticism?"

Who's Winning The 'Trade War'?

Just how crazy is Donald Trump?

Back at the beginning of March, the president famously tweeted:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
- President Donald Trump

You probably don’t remember what the exact reaction to that was, but you can probably guess it involved hoots of derisive laughter. After all, the idea of the president of the United States upsetting the world apple cart by supposedly starting a trade war with China and our biggest trade partners and closest allies was the height of lunacy.

But who’s laughing now? Continue reading "Who's Winning The 'Trade War'?"