How long can the Fed whistle past the "There is no inflation" graveyard before raising rates?

David Goldsmith

All Powerful Moderator
Staff member
5.5-6%? I think we got a few intra meeting fed hikes coming. 4% 10yr on way? Equities in this environment?
I don't think that's right. We are already in the mid to high 4s in mortgage rates. If the Fed raises rates another 4% I find it hard to conceive mortgages only go up 75bps to 125bps.


Well-known member
If he is right (and it's hard for me to argue against it since I've been feeding this thread for a year and a half) where does that push mortgage rates to and what is the impact on Real Estate?
I think it’d push mortgages to 5-6%. As the forward curve currently stands, resets on ARMs over the next 5 years are looking to come in at 5-6%. With FFR at 4-5%, that’d make resets come in at 6-8%. Either way, a far cry from the 2.x% ARMs and fixed rates people were using as recently as 6 months ago as the basis for their purchases.


Well-known member
I don't think that's right. We are already in the mid to high 4s in mortgage rates. If the Fed raises rates another 4% I find it hard to conceive mortgages only go up 75bps to 125bps.
You have to remember the market is already expecting the Fed to raise ~3% from here as it stands by 2023. So the Summers view would “only” be another 75bps to 175bps atop that.

Absent direct Fed intervention in the MBS market, 30yr fixed mortgages have tended to set at the 10yr treasury rate plus ~2%. Right now, the forward yield curve is very flat a year out. So the 10yr treasury yield is ~2.5% and 30yr fixed is ~4.5%.

If the Summers view is applied, then FFR in 2023 should become 4-5%. But I don’t believe he thinks it needs to stay there for 10 years. Rather, after a few years, it can normalize to what economists consider a neutral stance at 2.x%. So that means 10yr treasuries at 3-4%, and hence my guess of 5-6% for 30yr fixed mortgages.

Of course, this whole episode could shift the market’s notions of “neutral stance”. The Fed will be working down the $9T balance sheet it had been accumulating over the past 14 years. As the shocks of inflation-fighting ripple through these upcoming years, somehow I don’t think the Fed is going to be as trigger-happy with QE as it has in the past, having seen a demonstration that they can indeed take it too far.

David Goldsmith

All Powerful Moderator
Staff member
At this point I don't have much faith in Fed jawboning, but if somehow they both stop buying MBS and actually "run off" their existing MBS holdings, I don't see enough money in the mortgage market. From what I've been hearing from bankers, at this point their interest in lending their own money won't even start until mortgage rates hit 6%
Fed's balance sheet runoff will be rapid, Brainard says

Federal Reserve Governor Lael Brainard on Tuesday said she expects a combination of interest rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a "more neutral position" later this year, with further tightening to follow as needed.
The Fed on Wednesday releases minutes of its March meeting that are expected to provide fresh details on its plans to reduce its bond holdings, and Brainard's remarks provided a bit of a preview.

"I think we can all absolutely agree inflation is too high and bringing inflation down is of paramount importance," Brainard said at a conference at the Minneapolis Fed.

To do so, she said, the Fed will raise rates "methodically" and, as soon as next month, begin to reduce its nearly $9 trillion balance sheet, quickly arriving at a "considerably" more rapid pace of runoff than the last time the Fed shrank its holdings.

The rapid portfolio reductions "will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections," she said.
The hawkish tone from one of the Fed's usually more dovish policymakers sent stocks down and Treasury yields up to multi-year highs, as investors digested the implications of a more aggressive policy path.

Investors are concerned by "the speed and aggressiveness of the Fed with its balance sheet reductions," said CFRA Research's Sam Stovall.
The Fed raised rates last month for the first time in three years, and released projections showing most policymakers thought the policy rate would end the year at least in the range of 1.75%-2%, if not higher. That would require quarter-point rate increases at all six remaining Fed meeting this year.

Markets see the Fed moving faster, delivering half-point rate hikes in May, June and July, to bring the rate to 2.5%-2.75% by the end of this year. Most policymakers view 2.4% as a "neutral" level, above which borrowing costs start to reduce growth.
"Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19," Brainard said.

Back then, the Fed began by limiting runoff from its $4.5 trillion balance sheet to $10 billion a month, and took a year to ramp that up to a maximum of $50 billion a month. Analysts expect a pace about twice that this time around.

The Fed targets 2% inflation, as measured by the personal consumption expenditures price index. In February the PCE price index was up 6.4% from a year earlier, and Brainard said she sees risks of it rising further, as Russia's invasion of Ukraine pushes up gas and food prices, and COVID lockdowns in China worsen supply chain bottlenecks.
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And though the geopolitical events could pose risks to growth, she noted, the U.S economy has considerable momentum and the labor market is strong, with unemployment now at 3.6%, just a hair above its pre-pandemic level.
The Fed's signaling on policy has already tightened financial conditions, Brainard said, with mortgage rates up a full percentage point in the past few months.
"We are prepared to take stronger action" if warranted by readings on inflation or inflation expectations, Brainard said, adding that she would also be watching the yield curve for any signs of downside risks to the economy.

It was unclear from Brainard's remarks whether she feels a rapid portfolio runoff would render bigger-than-usual rate hikes unnecessary.
Kansas City Fed President Esther George, who also supports a faster balance sheet runoff, left that door open.
"I think 50 basis points is going to be an option that we’ll have to consider, along with other things," George told Bloomberg TV on Tuesday.

If the Fed does raise rates as fast as markets now predict, that would mark at least for a few months the fastest pace of policy tightening in decades.
Fed Chair Jerome Powell says he believes the Fed can manage a "soft landing," where the central bank raises borrowing costs enough to slow the economy and bring inflation down, but not enough to send unemployment surging or push the economy into recession.

Economists say that will be difficult, if not impossible: in a recent paper Harvard University's Larry Summers noted that since 1955 there has never been a time when wage growth exceeded 5% and the unemployment rate was below 5% that was not followed within two years by a recession.
Hourly wages for non-managerial employees rose 6.7% from a year earlier in each of January, February and March, Labor Department data show.

Fed officials argue however that past is not necessarily prelude. For one thing, workers are already coming off the labor market sidelines as the pandemic eases, and more of that trend could ease wage pressures.
For another, the United States is a net oil exporter, so rising energy prices won't slow the economy as much as they did in the 1970s, making stagflation less likely.
"I'm not expecting that we'll fall into recession," San Francisco Fed Bank President Mary Daly told a meeting of the Native American Finance Officers Association in Seattle.
As the Fed tightens policy to fight inflation, she said, "we could slow so it looks like we are teetering close to it, that's possible, but it will be a short-lived event I expect, and then we'll be back up."

David Goldsmith

All Powerful Moderator
Staff member
Producer Price Index is a leading indicator for consumer prices. To me this says inflation is continuing to rise.
Supplier prices rose 11.2% from a year ago in March, the biggest gain on record
  • The producer price index, which measures prices paid by wholesalers, rose 1.4% in March and 11.2% from a year ago, both records for data going back to 2010.
  • Prices for final demand goods led with a 2.3% monthly rise, while services prices gained 0.9%.
  • Wednesday's release comes the day after the BLS reported the consumer price index for March surged 8.5% over the past year.
Producer prices soar 11.2% from a year ago in March, hit new all-time high
The prices that goods and services producers receive rose in March at the fastest pace since records have been kept, the Bureau of Labor Statistics reported Wednesday.
The producer price index, which measures the prices paid by wholesalers, increased 11.2% from a year ago, the most in a data series going back to November 2010. On a monthly basis, the gauge climbed 1.4%, above the 1.1% Dow Jones estimate and also a record.
Stripping out food, energy and trade services, so-called core PPI rose 0.9% on a monthly basis, nearly double the 0.5% estimate and the biggest monthly gain since January 2021. Core PPI increased 7% on a year-over-year basis.
PPI is considered a forward-looking inflation measure as it tracks prices in the pipeline for goods and services that eventually reach consumers.
Wednesday's release comes the day after the BLS reported that the consumer price index for March surged 8.5% over the past year, above expectations and the highest reading since December 1981.
On the producer side, prices for final demand goods led with a 2.3% monthly rise, while services prices gained 0.9%, up sharply from the 0.3% February increase. Goods inflation has outstripped services during the Covid pandemic, but March's numbers indicate that services are now catching up as consumer demand shifts.
Energy prices were the biggest gainer for the month, rising 5.7%, while food costs increased 2.4%.
Swelling inflation has prompted the Federal Reserve to begin tightening monetary policy.
In March, the Fed increased its benchmark short-term borrowing rate by 0.25 percentage point as the first step in what is expected to be a series of hikes through the year. Markets are pricing in an almost certainty that the central bank will double that move at its May meeting, and will keep going until the fed funds rate hits about 2.5% by the end of the year.
Markets initially showed no reaction to the PPI news, with stock market futures hovering around flat and Treasury yields also little changed.

David Goldsmith

All Powerful Moderator
Staff member

If You Must Point Fingers on Inflation, Here’s Where to Point Them​

As the midterm elections draw nearer, a central conservative narrative is coming into sharp focus: President Joe Biden and the Democratic-controlled Congress have a made a mess of the American economy. Republicans see pure political gold in this year’s slow-motion stock market crash, which seems to be accelerating at the perfect time for a party seeking to regain control of Congress in the fall.
The National Republican Congressional Committee in a tweet last month quipped that the Democratic House agenda includes a “tanking stock market.” Conservatives have been highlighting a video clip from 2020 when then-president Donald Trump warned about a Joe Biden presidency: “If he’s elected, the stock market will crash.” Right wing pundit Sean Hannity’s blog featured the clip under the headline: “TRUMP WAS RIGHT.”
But the narrative pinning blame for the economy’s woes squarely on Democrats’ shoulders elides the true culprit: the Federal Reserve. The financial earthquakes of 2022 trace their origin to underground pressures the Fed has been steadily creating for a over a decade.

It started back in 2010, when the Fed embarked on the unprecedented and experimental path of using its power to create money as a primary engine of American economic growth. To put it simply, the Fed created years of super-easy money, with short-term interest rates held near zero while it pumped trillions of dollars into the banking system. One way to understand the scale of these programs is to measure the size of the Fed’s balance sheet. The balance sheet was about $900 billion in mid-2008, before the financial market crash. It rose to $4.5 trillion in 2015 and is just short of $9 trillion today.

All of this easy money had a distinct impact on our financial system — it incentivized investors to push their money into ever riskier bets. Wall Street-types coined a term for this effect: “search for yield.” What that means is the Fed pushed a lot of money into a system that was searching for assets to buy that might, in return, provide a decent profit, or yield. So money poured into relatively risky assets like technology stocks, corporate junk debt, commercial real estate bonds, and even cryptocurrencies and nonfungible tokens, known as NFTs. This drove the prices of those risky assets higher, drawing in yet more investment.

The Fed has steadily inflated stock prices over the last decade by keeping interest rates extremely low and buying up bonds — through a program called quantitative easing — which has the effect of pushing new cash into asset markets and driving up prices. The Fed then supercharged those stock prices after the pandemic meltdown of 2020 by pumping trillions into the banking system. It was the Fed that primarily dropped the ball on addressing inflation in 2021, missing the opportunity to act quickly and effectively as the Fed chairman, Jerome Powell, reassured the public that inflation was likely to be merely transitory even as it gained steam. And it’s the Fed that is playing a frantic game of financial catch-up, hiking rates quickly and precipitating a wrenching market correction.

So, now the bill is coming due. Unexpectedly high inflation — running at the hottest levels in four decades — is forcing the Fed to do what it has avoided doing for years: tighten the money supply quickly and forcefully. Last month, the Fed raised short-term rates by half-a-percentage point, the single largest rate hike since 2000. The aggressiveness of the move signaled that the Fed could take similarly dramatic measures again this year.

A sobering realization is now unfolding on Wall Street. The decade of super-easy money is likely over. Because of inflation’s impact, the Fed likely won’t be able to turn on the money spigots at will if asset prices collapse. This is the driving force behind falling stock prices, and why the end of the collapse is probably not yet in sight. The reality of a higher-interest-rate world is working its way through the corridors of Wall Street and will likely topple more fragile structures before it’s all over.

After the stock and bond markets adjust downward, for example, investors must evaluate the true value of other fragile towers of risky assets, like corporate junk debt. The enormous market for corporate debt began to collapse in 2020, but the Fed stopped the carnage by directly bailing out junk debt for the first time. This didn’t just save the corporate debt market, but added fuel to it, helping since 2021 to inflate bond prices. Now those bonds will have to be re-priced in light of higher interest rates, and history indicates that their prices will not go up.

And while the Fed is a prime driver of this year’s volatility, the central bank continues to evade public accountability for it.
Just last month, for instance, the Senate confirmed Mr. Powell to serve another four-year term as Fed chairman. The vote — more than four to one in favor — reflects the amazingly high level of bipartisan support that Mr. Powell enjoys. The president, at a White House meeting in May, presented Mr. Powell as an ally in the fight against inflation rather than the culprit for much of this year’s financial market volatility. “My plan is to address inflation. It starts with a simple proposition: Respect the Fed and respect the Fed’s independence,” the president said.

This leaves the field open for the Republican Party to pin the blame for Wall Street’s woes on the Democratic Party’s inaction. As Jim Jordan, the Republican congressman from Ohio, phrased it on Twitter recently, “Your 401k misses President Trump.” This almost certainly presages a Republican line of attack over the summer and fall. It won’t matter that this rhetoric is the opposite of Mr. Trump’s back in 2018 and 2019, when the Fed was tightening and causing markets to teeter. Back then, Mr. Trump attacked Mr. Powell on Twitter and pressured the Fed chairman to cut interest rates even though the economy was growing. (The Fed complied in the summer of 2019.) But things are different now. Mr. Biden is in office, and the Fed’s tightening paves a clear pathway for the Republican Party to claim majorities in the House and Senate.

Republicans have also honed in on Mr. Biden’s $1.9 trillion American Rescue Plan, meant to mitigate the impact of the Covid-19 pandemic, as a cause for runaway inflation. Treasury Secretary Janet Yellen rejected that, noting in testimony before members of Congress: “We’re seeing high inflation in almost all of the developed countries around the world. And they have very different fiscal policies. So it can’t be the case that the bulk of the inflation that we’re experiencing reflects the impact” of the American Rescue Plan.
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Democrats would be wise to point to the source of the problem: a decade of easy money policies at the Fed, not from anything done at the White House or in Congress over the past year and a half.
The real tragedy is that this fall’s election might reinforce the very dynamics that created the problem in the first place. During the 2010s, Congress fell into a state of dysfunction and paralysis at the very moment when its economic policymaking power was needed most. It should be viewed as no coincidence that the Fed announced that it would intensify its experiments in quantitative easing on Nov. 3, 2010, the day after members of the Tea Party movement were swept into power in the House. The Fed was seen as the only federal agency equipped to forcefully drive economic growth as Congress relegated itself to the sidelines.
With prices for gas, food and other goods still on the rise and the stock market in a state of flux, there may still be considerable pain ahead for consumers. But Americans shouldn’t fall for simplistic rhetoric that blames this all on Mr. Biden. More than a decade of monetary policy brought us to this moment, not 17 months of Democratic control in Washington. Voters should be clear-eyed about the cause of this economic chaos, and vote for the party they think can best lead us out of it.

David Goldsmith

All Powerful Moderator
Staff member
Fed Intensifies Efforts to Locate Lost Plot
It has to restore its own credibility and fight inflation while avoiding a huge recession. Best of luck.

Good Luck, Fed​

A key artifact in any future Museum of the American Coronavirus Experience will be the absolutely bonkers Rube Goldberg machine a YouTuber named Creezy spent two lockdown months creating in his backyard between March and May of 2020. The 70-step basketball shot takes nearly three minutes to complete, with interlocking toys, ropes, garden implements and sportsballs covering what must be an acre of hilly land. There’s even a water feature.

This complexity is only a taste of the Fed’s dilemma as it tries to squelch a raging inflation inferno without destroying the economy in the process. The Fed today raised its key interest rate by 75 basis points, the biggest move since 1994, as markets expected. But Chairman Jay Powell said policy makers might not raise rates by that much in July, which made markets happy. But making markets happy is bad because that makes it harder to fight inflation. But making markets sad makes it likelier we have a financial crisis/depression.

So did the Fed do the right thing or not? Before the decision, Mohamed El-Erian wrote central bankers needed to do much more than just raise 75 basis points in order to restore what he argues is shredded credibility. The necessary steps included making people feel better about the Fed’s predicting skills and sounding tougher on inflation. It’s hard to say just how much today’s efforts succeeded.

After the decision, Mohamed tweeted the Fed had raised and front-loaded its rate expectations while cutting its growth expectations, which sounds pretty hawkish. He called this “Consistent with a stagflationary baseline, a fatter recession left tail, and a thinner right tail.” Which, uh, yay?

A lot of people think the Fed will have to trigger a recession to stop inflation. Powell said that wasn’t his aim, which sounds kind of dovish. At the same time, the Fed is predicting higher unemployment by the time this nightmare is over. Bloomberg’s editorial board writes that being more aggressive now might mean getting inflation under control sooner, meaning it can be less aggressive later. But figuring out the precise volume, frequency and timing of aggression is dicier than a 70-step basketball shot.

Because with so many moving parts, it’s not always clear a rate hike at one end of the Rube Goldberg machine will result in lower prices at the other. For example, Conor Sen points out surging mortgage rates could
shut down the housing market so abruptly that it turns off builders and hollows out the real-estate-industrial complex. That will mean housing shortages persist, keeping prices high. In conclusion, it’s complicated.

Bonus Central-Bank Reading: The ECB’s emergency meeting was a big nothing burger and won’t help peripheral bonds.