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"

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?"

The Powell Era Begins

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


New Federal Reserve chair Jerome Powell had all kinds of excuses not to raise interest rates at last week’s FOMC meeting:

  • The yield on the 10-year Treasury note was trading close to its highest point in more than four years and dangerously close to breaking the 3% barrier.
  • Stocks have fallen well off their highs, and investors are nervous about the prospects of a potential trade war between the U.S. and its biggest trading partners, particularly China and Canada.
  • The threat of that trade war has influenced some economic forecasters to lower their GDP growth forecasts for the first quarter to below 2%, which would be the lowest level since President Trump took office.
  • The turmoil in the Trump Administration, with cabinet secretaries and other senior officials jumping ship or being pushed overboard, doesn’t help calm the waters.

Yet Powell and the seven other voting members of the Federal Open Market Committee saw fit to raise the federal funds rate by a quarter percentage point to a range between 1.5% and 1.75%. Not only that, but the FOMC stuck to its guns and indicated a steady diet of rate increases over the next three years, pushing rates closer and closer back to what used to be normal before the global financial crisis. After three rate increases this year, three more are likely next year followed by two more in 2020, which would boost the fed funds rates to a range of 3.25% and 3.5%.

And yet the world didn’t end. In fact, the yields on Treasury securities actually fell after the meeting ended on Wednesday afternoon. The 10-year note, the bond market’s long-term benchmark, trading just below 2.90% on Tuesday, fell five basis points after the meeting to 2.85%. The yield on the two-year note, which is more sensitive to interest rate changes, dropped seven bps after the meeting. Continue reading "The Powell Era Begins"

Be Careful What You Wish For

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


When doing some background research for this column, I came across this article in the May 12, 2017, edition of the Los Angeles Times: “Something Trump and Elizabeth Warren Agree On: Bringing Back Glass-Steagall to Break Up Big Banks.”

Whatever happened to that idea?

As kookie and wrong-headed on other issues as Senator “Pocahontas” often is, she’s at least been pretty consistent when it comes to her view of the banking industry (she doesn’t like it). And according to the article, she wasn’t alone in wanting to “break up the biggest U.S. banks.” Guess who else was on that list? None other than departing White House chief economic advisor Gary Cohn.

Trump himself said, “We’re looking at it right now as we speak,” referring to “going back to the old system” under the Glass-Steagall Act in which commercial and investment banking were separated. Continue reading "Be Careful What You Wish For"