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The Fed Versus Taylor Swift
What came first, inflation, market pricing, Wall Street Fed calls or Fedspeak?
It's hard to say these days. We're stuck on a kind of merry-go-round. Or in a hall of mirrors, if you like.
Goldman on Wednesday added a hike to their official Fed call. The bank now looks for 50bps in December, then three consecutive 25bps increments after that, for a peak of 5-5.25%. The figures (below) illustrate Goldman's forecast versus market pricing.
"The median FOMC participant projected a peak funds rate
“It now seems abundantly clear that markets can’t handle much more rate hiking after a decade of duration- and leverage-binging, as evidenced by the list of breakage experienced over the past 12 months…”
I’d like to see McElligott’s evidence for this statement. From where I sit — which most definitely is not “in the room” — the past twelve months in financial markets looks like a pretty ordinary correction of a situation (free-money-fueled global bubble) that was unsustainable. Has the abrupt reversal of CB policy caused things to break? Sure. Are we on the precipice of a global financial crisis with the Feds fund rate and 10yr at ~375bps? I want to see concrete evidence.
“… which most definitely is not ‘in the room'”
You answered your own question.
Also, the UK pension complex nearly imploded last month.
And no, it’s not “a pretty ordinary correction.” This is the worst year for US bonds since George Washington was president, according to one index.
Also, find me a year when IG corporate credit was down 20% (don’t waste your time — you won’t find one).
The goal of monetary policy isn’t to push the world to the “precipice of a global financial crisis.” That’s not how this works.
I realize you’re in that camp of people who likes to leave a passive aggressive comment on any article that even vaguely suggests the Fed might be on the brink of making a hawkish mistake, but if your threshold for dialing back rate hikes is “concrete evidence” of an imminent global financial calamity, then God help us all if you ever end up in any sort of role that allows you to make decisions about policy.
I mean, I could try to rebut your points: yes, bonds had a terrible year — after a historic 40-year bull market; UK pension managers (and their advisors) have no more credibility as stewards of other people’s money than SBF; many of the people warning about a hawkish Fed policy mistake are anxious about their speculative, over-levered positions — but why bother. Not trying to be passing aggressive, just trying to call BS on the financialization of the U.S. and global economies. But, hey, if private-the-profits socialize-the-losses is the name of the game, I’ll try harder to get with the program.
This is a much better comment than your original comment, which is what I was after.
But, also, we have to deal with the system as it is. And, as you note, everything is thoroughly financialized. We can’t just pretend as though that isn’t the case. It’s obviously our fault that it became this way, but one can conjure myriad examples of scenarios in which we place ourselves in suboptimal positions, but have to be careful about how we go about extricating ourselves, lest we should inadvertently do more harm than good. The same principle applies here. There’s a way out of this. But it probably isn’t 8% Fed funds.
Drawing on their extensive private sector experience, Bullard & Waller continue to try and “out-hawk” one another. What is the point of all of these Fed utterances? (Besides setting up to be Ronnie-D’s choice to be Fed chairman?)
H, if this Taylor Swift video doesn’t resonate with you, you’re not the man i thought you were: https://m.youtube.com/watch?v=b1kbLwvqugk
Who is Taylor Swift?
Raising interest rate to cool demand really only hurts the middle class that are drowning in debt, be it consumer or mortgage. (btw, many mortgages in Canada are variable rates tie to the BoC rate). Wealthy pay cash and don’t complain about $2000 shoes went up 10%.
The middle class will mindlessly go about their life, while higher mortgage and debt payment sip away at their savings, and eventually be cash flow negative and increasing rely on debt to pay for the monthly negative cash flow. However, this will take time to build, and even more time for it to become a crisis. It takes a few months to go from paying credit card bill in full, to paying minimum, to skip payment, to become delinquent, and finally collection agency starts calling.
Even under money stress, middle class will still travel after 3 years of Covid lock down, and figure out the payment later.
Very few middle class actually do a budget, never mind budget with a stress test on possible inflations and higher mortgage rate. If they are doing this regularly, I don’t think they remain in the middle class for too long.
Recent history (2018) suggests that eventually the Fed will blink first. Maybe this time is different. The Fed shot itself in the foot when it pivoted back then, now the markets have to price in an eventual pivot before the Fed reaches the rate levels that they keep saying is their target. I agree that the Fed should just keep their collective mouths shut and adjust rates as they deem necessary. Forward guidance is only good if the Fed does what they say they will do. Maybe if they kept their guidance down to a shorter time window such as “over the next three months we anticipate…”?