1/11
What is the bond market telling us?
I would argue that the Fed will hike rates so much in 2022 that they will "break something."
And they really don't have a choice.
A thread to explain.
What is the bond market telling us?
I would argue that the Fed will hike rates so much in 2022 that they will "break something."
And they really don't have a choice.
A thread to explain.
2/11
First, what are the markets signaling?
Three rate hikes in 2022 are priced in (>50%, green).
A March hike (35%) and a potential 4th hike in February 2023 (38%) are not out of the question, still below 50% but "in the conversation."
First, what are the markets signaling?
Three rate hikes in 2022 are priced in (>50%, green).
A March hike (35%) and a potential 4th hike in February 2023 (38%) are not out of the question, still below 50% but "in the conversation."
3/11
The next chart shows, the terminal funds rate, or the rate at which the Fed will stop hiking, is somewhere between 1.75% to 2.00%.
If the Fed follows the market and hikes 4 times over the next 15-ish months, they will only be 2 hikes away from the terminal rate.
The next chart shows, the terminal funds rate, or the rate at which the Fed will stop hiking, is somewhere between 1.75% to 2.00%.
If the Fed follows the market and hikes 4 times over the next 15-ish months, they will only be 2 hikes away from the terminal rate.
4/11
The ends of the yield curve are marching to their own beats.
* Short rates are relentlessly rising.
* Long rates are trending sideways.
The ends of the yield curve are marching to their own beats.
* Short rates are relentlessly rising.
* Long rates are trending sideways.
5/11
This has resulted in a massive flattening of the yield curve.
This has resulted in a massive flattening of the yield curve.
6/11
So, what does this all mean?
The Fed is often criticized for hiking rates until something breaks. We believe the low terminal funds rate means it will not take much to break the economy.
So, what does this all mean?
The Fed is often criticized for hiking rates until something breaks. We believe the low terminal funds rate means it will not take much to break the economy.
7/11
Relentlessly rising short rates are a signal that the Fed is behind the curve on inflation and needs to hike aggressively.
Sideways long rates and a flattening yield curve could reflect the market’s fear that the Fed will "break something" with these hikes.
Relentlessly rising short rates are a signal that the Fed is behind the curve on inflation and needs to hike aggressively.
Sideways long rates and a flattening yield curve could reflect the market’s fear that the Fed will "break something" with these hikes.
8/11
Why might the Fed have no choice but to hike until they break something?
While wages are rising (4.9%), they are not keeping pace with inflation (6.8%). Lower incomes are falling behind.
Upper incomes are ok because they have stock/housing gains to offset inflation.
Why might the Fed have no choice but to hike until they break something?
While wages are rising (4.9%), they are not keeping pace with inflation (6.8%). Lower incomes are falling behind.
Upper incomes are ok because they have stock/housing gains to offset inflation.
9/11
The country knows inflation is hurting them and they are not happy about it!
CNBC poll yesterday was bad for Biden. Why?
"Inflation has now firmly eclipsed the coronavirus as the No. 1 concern for the country"
cnbc.com/2021/12/10/pub…
The country knows inflation is hurting them and they are not happy about it!
CNBC poll yesterday was bad for Biden. Why?
"Inflation has now firmly eclipsed the coronavirus as the No. 1 concern for the country"
cnbc.com/2021/12/10/pub…
10/11
So, here are the Fed's choices, both are bad.
* Respond to inflation and hike aggressively. The flattening yield curve say this is what the Fed will do, hike too much and break the economy.
* Don't respond to inflation and destroy their reputation and democrat party.
So, here are the Fed's choices, both are bad.
* Respond to inflation and hike aggressively. The flattening yield curve say this is what the Fed will do, hike too much and break the economy.
* Don't respond to inflation and destroy their reputation and democrat party.
11/11
By waiting too long the option to help both at the same time might be gone. Powell has to pick one:
* Help rich people by goosing asset prices with easy money
* Help poor people by stopping inflation from hurting them and save Biden's approval rating?
By waiting too long the option to help both at the same time might be gone. Powell has to pick one:
* Help rich people by goosing asset prices with easy money
* Help poor people by stopping inflation from hurting them and save Biden's approval rating?
Bonus tweet #1
After a round of Trump mean tweets directed at the Fed/Powell, former NY Fed President Bill Dudley wrote this op-ed in August 2019.
bloomberg.com/opinion/articl…
After a round of Trump mean tweets directed at the Fed/Powell, former NY Fed President Bill Dudley wrote this op-ed in August 2019.
bloomberg.com/opinion/articl…
#2
In it he actually said:
There’s even an argument that the election itself falls within the Fed’s purview. ... Fed officials should consider how their decisions will affect the political outcome in 2020.
In it he actually said:
There’s even an argument that the election itself falls within the Fed’s purview. ... Fed officials should consider how their decisions will affect the political outcome in 2020.
#3
So, Dudley threatened Trump by saying the Fed will wreck the economy to turn the election against him.
Now these words might again be right ... for the democrat party.
Wil the Fed save the "donor class" or "democrat voters?" for the 2022 mid-terms?
So, Dudley threatened Trump by saying the Fed will wreck the economy to turn the election against him.
Now these words might again be right ... for the democrat party.
Wil the Fed save the "donor class" or "democrat voters?" for the 2022 mid-terms?
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