Displaying items by tag: fed
There is No Risk Greater Than the Fed
Inflation surged to a nearly 40-year record high as the CPI index annual inflation pushed to 7.5%. This number was well above expectations and even core inflations 6% posting came in higher than consensus. In response, the Fed is going to tighten and do so significantly as regional Fed Presidents are expecting a 1% rise in the Fed Funds rate. This is a seriously hawkish turn and given there are only 3 more FOMC meetings with projections that would imply a 50-basis point rate hike possibility. The fed hasn’t hiked rates that quickly since the turn of the century. Investors are saying the Fed will want to hike by 50-basis points to keep its credibility.
Finsum: Hikes that steep could destroy the record recovery the US has had, it could lead to major windfalls in equities markets.
Biden to Let Inflation Run Wild
That's correct, Joe Biden’s latest economic rebrand is really a diet version Ronald Reagan era policy. In a recent statement, Joe Biden said that in response to inflation we can either “increase the supply of cars” or “reduce demand for cars by making Americans poorer”. This is essential supply-side economics made famous by the Reagan administration. Additionally, Yellen coined the term ‘modern supply-side’ economics just two weeks later in order to push the Build Back Better bill. This is a liberal tilt on aiding the weakening supply chains that will hopefully strengthen the economic recovery. It's a response to republicans’ attacks that BBB will surge debt and inflation.
FINSUM: The economy is in a difficult place, there is still catch up needed but undoubtedly Americans are feeling the force of inflation and another stimulus package could only further that problem.
Goldman Says This is Causing the Market Turmoil
Quantitative easing was the process of flooding the market with money in exchange for buying up long-term government debt and MBS; quantitative tightening was coined by Citigroup in order to describe the unwinding of this process. Goldman Sachs says this is causing increased volatility and sapping liquidity out of the treasury market. This QT could come with an abundance of arbitrage opportunities particularly in U.S. interest rate markets. Additionally, Goldman says QT will widen the gaps in new and old securities and narrow treasury yields and swap rates. F
INSUM: The treasury market is ripe for turmoil with the upcoming rate hike in March.
Rate Hikes Loom
Many investors and lots of market data suggested that interest rate hikes to the federal funds rate were coming at this last FOMC meeting. However, the Fed made a minor splash by withholding on hiking interest rates, but almost guaranteeing them in march. Higher borrowing costs will come in large part due to rising inflation and running a very tight labor market. Powell said this latest economic expansion varied drastically from the previous with significant growth and higher inflation. Powell also signaled that the Fed will soon begin to unwind the balance sheet as they raise rates. Treasury yields were already on the rise after the Feds statement and stocks ended in losses on the news too.
FINSUM: When the rate hikes come they most likely only happen on the Feds March, June, September, and December meetings because the Fed views its large ‘Summary of Economic Projections as critical to their forward guidance policy.
Jamie Dimon Gets Ultra Bearish
Goldman and many other Forecasters have upped their projections for the number of rate hikes in 2022, but most are calling for a timid four in order for the fed to better combat inflation. CEO of JPMorgan Dimon, however, sees a much more aggressive Fed. Dimon says the Fed will hike rates six or seven times in 2022, which would bring the baseline FFR up to a whopping 2%. Dimon says 200 basis points used to be an overnight adventure for the Fed during the Volcker administration. Despite these wildly hawkish projections Dimon still sees the fed threading the needle and maintaining a balanced growth path while fighting inflation. Others called Dimon’s projections irresponsible and said the market would suffer greatly for hikes that severe.
FINSUM: There is no way the Fed could hike rates 2% in 2022 and maintain a balanced growth path, however, the Powell Fed bringing inflation back down and not taking the economy is still the most likely outcome, just not under seven rate hikes.