7 replies to this topic

[Douglas]

Recently longer dated interest rates have turned down apparently putting in some sort of top as can be seen below.  This has cheered the stock market which believes the Fed will follow the bond market and taper the rate of increases in the Fed funds rate starting in December.

 

 

It's currently common wisdom that given the plot shown below of the 3-month treasury bill versus the Fed Funds rate, in December the Fed will raise the lower end of its target range currently at 3.75% just up to 4.25% or by 1/2 % to roughly match the current 4.31% 3-month treasury bill rate.

 

 

This projection completely ignores what Volker, whom Powell is fond of quoting, did in response to the last big inflation bubble.  Volker cranked the Fed funds rate several percent higher than the then 3-month debt rate as shown below.  This plot would call for Powell to keep his foot on the gas and go large with a 3/4% increase.  The December Fed decision will be a clear indication if Powell is really walking the talk when he mentions Volker, or if he is just Arthur Burns in wolf's clothing.

 

 

Regards,

Douglas

Edited by Douglas, 16 November 2022 - 02:01 PM.

[slupert]

Recently longer dated interest rates have turned down apparently putting in some sort of top as can be seen below.  This has cheered the stock market which believes the Fed will follow the bond market and taper the rate of increases in the Fed funds rate starting in December.

 

 

It's currently common wisdom that given the plot shown below of the 3-month treasury bill versus the Fed Funds rate, in December the Fed will raise the lower end of its target range currently at 3.75% just up to 4.25% or by 1/2 % to roughly match the current 4.31% 3-month treasury bill rate.

 

 

This projection completely ignores what Volker, whom Powell is fond of quoting, did in response to the last big inflation bubble.  Volker cranked the Fed funds rate several percent higher than the then 3-month debt rate as shown below.  This plot would call for Powell to keep his foot on the gas and go large with a 3/4% increase.  The December Fed decision will be a clear indication if Powell is really walking the talk when he mentions Volker, or if he is just Arthur Burns in wolf's clothing.

 

 

Regards,

Douglas

Lok at the 2's and 10s spread, ugly.

[Douglas]

slupert, the last time the 10 yr - 2yr T-spread got this large was in the years leading up to the 1982 recession which I remember well.  Volker started tightening in about 1979 and then eased up a bit in early 1980 thinking he had whipped inflation when the economy rolled over into a short mild recession only for inflation to come roaring back forcing him to tighten even more later that year for even longer resulting in the severe 1981-1982 recession.  Notice what the Fed funds rate was at the end of that recession, about double what it is now.  This Fed is bringing a knife to gun fight.

 

 

 

Regards,

Douglas

[fib_1618]

The Fed Watch tool continues to suggest an 85% chance of a 1/2% hike for December...another 1/4% for February and then a pause.

 

It's been very much on "target" since January.

 

Fib

[Douglas]

fib_1618, I agree that the most likely action in December is a 1/2% bump in the Fed funds rate since I am convinced that Powell is going to make the same mistake that Paul Volker did when he first tried to whip inflation which is a bit surprising given Powell has publicly noted that he has studied Volker's writings.  I was just trying to make a case that an early taper is probably the wrong decision. 

 

A swimming analogy can explain why I think the Fed is making a mistake.  When I was a kid in the Ozarks, summers were spent swimming in the spring-fed mountain streams.  When I first got in, the cold water would literally take my breath away, but after a few minutes of splashing around, I would get used to the icy water and enjoy myself.  The current interest rates are not high historically, and the debt market is basically this cold Crooked Creek which folks will again quickly adjust to just raising prices to compensate creating a higher inflation platform.  Once the market has made this adjustment to the somewhat higher interest rates, the Fed will be forced to stomp on the brakes even harder when it becomes apparent that their 2% goal is not even close to being achievable.

 

American Generals Sherman, Patton and Schwarzkopf all knew the value of shock and awe in battle.  The Fed is in a battle and if they use a popgun instead of a cannon in their attack, they will not put the fear of the almighty into anyone.

 

If I am right and the Fed's early taper results in failure, then the timing of this forced second interest increase wave which should kick off the next wave down in the stock market becomes the real question.  In the early 1980's it took something like 6 to 9 months from Volker's mistaken tapper for the realization to set in that a second attack would be needed.  That sets the clock for the required current second attack to take place maybe in the summer or fall of 2023 if Powell starts the taper this December.  

 

Regards,

Douglas

[pdx5]

During Vocker era, there was no shortage of fuel, especially diesel. Powell is lucky. Inflation will come down NATURALLY in 2023 due to serious recession. Biden will get Powell off the hook. Powell will get the credit for reducing inflation. But real credit belongs to Biden for engineering serious recession with his energy policies.

[Douglas]

pdx5, during the early days of the Volker term in 1979 there definitely was a fuel crisis caused by trouble in the Middle East particularly Iran resulting in reduced crude supply and caused by Jimmy Carter who froze prices and tried unsuccessfully to ration fuel supplies.  I can still remember having to get in long lines at the gas station to fuel up like the one in the photo below.  For more background see the following Fed article:  Oil Shock of 1978–79 | Federal Reserve History   Energy price shock was at the heart of the acceleration of inflation back then just as it is now.  Back then loose Fed policy also made the inflation worse as it has now.  Of course, the real kicker for inflation this time around was all the stimulant money handed out just when supply was constrained by the pandemic.

 

 

Regards,

Douglas

[pdx5]

Oh yes, Douglas, I remember the gasoline embargo well. I had a 70 mile round trip drive to work and I was in a panick when rumors of gas rationing were being heard. However the embargo ended quickly after Reagan was in office. So if my memory serves me right (always a question mark!) Volker's high federal funds rates continued for a while and there was plenty of gas available during Reagan's admin.