Wharton professor Jeremy Siegel says Jerome Powell is making one of the biggest policy mistakes in the Fed’s 110-year history, and it could lead to a major recession

Link: https://finance.yahoo.com/news/wharton-professor-jeremy-siegel-says-191800487.html

Excerpt:

The Wharton professor Jeremy Siegel has a big issue with the Federal Reserve’s aggressive interest-rate hikes in its bid to tame inflation, and he’s worried that the central bank is making the biggest mistake in its history and may provoke a steep recession.

Siegel said inflation is starting to come down significantly, but the Fed is still moving forward with its rate hikes.

He said it could be “one of the biggest policy mistakes in the 110-year history of the Fed, by staying so easy when everything was booming.”

…..

“I think the Fed is just way too tight. They’re making exactly the same mistake on the other side that they made a year ago,” Siegel added.

To Siegel’s point, the Fed has had a lousy record of accurately forecasting where it expects interest rates to be just a few months into the future.

….

“I am very upset. It’s like a pendulum. They were way too easy through 2020 and 2021, and now ‘we’re going to be real tough guys until we crush the economy,'” Siegel said of the Fed.

Siegel expects the Fed to “eventually see the light” as none of their recent predictions are likely to come true.

“I think they’re going to be forced to lower the rates much more rapidly than they think,” Siegel said, a move that could set up stocks for a potential recovery from their ongoing decline.

Author(s): Matthew Fox

Publication Date: 25 Sept 2022

Publication Site: Yahoo Finance

Dot Plot Show Fed Anticipates More Hikes in 2023 to 4.50 Percent

Link: https://mishtalk.com/economics/dot-plot-show-fed-anticipates-more-hikes-in-2023-to-4-50-percent

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Hikes Come Hell or High Water? 

  • The Fed participants have a median expectation of 4.25 to 4.50 percent for the end of 2022
  • That’s another 1.25 percentage points more this year.
  • The Fed then anticipates one more hike in 2023 to 4.50 to 4.75 percent.

I have to admit that a year ago I did not foresee this. But here we are. 

The key question is not where we’ve been but where we are headed. I Highly doubt the Fed hikes another 1.25 percentage points this year or gets anywhere close to 4.50 to 4.75 percent in 2023.

Author(s): Mike Shedlock

Publication Date: 21 Sept 2022

Publication Site: Mish Talk

Two-Year Treasury Yield Highest Since 2007, Everything Inverted Over 1 Year

Link: https://mishtalk.com/economics/two-year-treasury-yield-highest-since-2007-everything-inverted-over-1-year

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The curve has been inverted in places for over a year. This is a recession signal and I believe the economy went into recession in May. 

The Fed is merrily hiking away and is likely to keep doing so until it breaks something big time. The Fed will hike 75 basis points tomorrow and the market thinks another 75 basis points is coming in November. 

If so, it is doubtful the markets will like it much. 

Author(s): Mike Shedlock

Publication Date: 20 Sept 2022

Publication Site: Mish Talk

The biggest Fed rate hike in 40 years? It could be coming next week.

Link: https://www.marketwatch.com/story/the-biggest-fed-rate-hike-in-40-years-it-might-be-coming-11663097227

Excerpt:

After another dismal U.S. inflation report, economists at the brokerage Nomura Securities on Tuesday became the first on Wall Street DJIA, 0.12% to predict a full-percentage-point increase in the Fed’s benchmark short-term rate.

“We continue to believe markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” the economists at Nomura wrote in a report to clients.

The last time the Fed made such a drastic move was in the early 1980s — another period marked by sky-high inflation.

At each of the last two meetings, the monetary-policy-setting Federal Open Market Committee raised the targeted rate by 0.75 point.

Author(s): Jeffry Bartash

Publication Date: 13 Sept 2022

Publication Site: MarketWatch

Sources of Fluctuations in Short-Term Yields and Recession Probabilities

Link: https://www.chicagofed.org/publications/chicago-fed-letter/2022/469

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We simulate future realizations of the policy gap and the slope of inflation forecasts from the 2022:Q2 initial conditions through 2023:Q4 using the ABC model. We then evaluate the recession probability predicted by our preferred probit model for each of these simulated paths. Through this analysis, we show that future inflation outcomes and the odds of a recession depend critically on both the pace of removal of monetary policy accommodation and on how restrictive the monetary policy stance will become over the medium term. In particular, we highlight two scenarios: The first one, which we refer to as the “baseline case,” reflects the ABC model forecasts or, equivalently, the average of all simulated paths. The second one, which we label the “tighter-policy scenario,” is characterized by a faster removal of monetary policy accommodation; it is identified by the average of the simulated paths in which policy becomes restrictive by the end of 2022.11

1. Baseline case: As of early June 2022, the ABC model predicts that nominal and real yields will rise over the next six quarters, the current policy gap will narrow and become mildly restrictive in mid-2023, while core inflation will fall and remain around one percentage point above its model-implied longer-run expectations through 2023 (figure 2, blue lines in panels A and B). The expected tightening of the policy gap and a downward-sloping expected inflation path combine to increase the one-year-ahead recession probability to about 35% by 2023 (figure 2, blue line panel C). Such a level is comparable to the one estimated ahead of the 1994 monetary policy tightening cycle that was followed by a soft-landing scenario.

2. Tighter-policy scenario: In this alternative scenario, monetary policy becomes more restrictive than in the baseline case, in that the policy gap is markedly restrictive over 2023. In this case we find that core inflation declines more rapidly than under the baseline, closing the gap with its model-implied longer-run expectations almost completely by the end of 2023. By that date, in this scenario the likelihood of a recession approaches 60%, a level that, based on our historical estimates, is generally followed by a recession in our sample (figure 2, red lines).

Author(s): Andrea Ajello , Luca Benzoni , Makena Schwinn , Yannick Timmer , Francisco Vazquez-Grande

Publication Date: August 2022

Publication Site: Federal Reserve Bank of Chicago

Fed Rate Hike Odds Jump to Full Point After the Hot CPI Report

Link: https://mishtalk.com/economics/fed-rate-hike-odds-jump-to-full-point-after-the-hot-cpi-report

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Yesterday, the market penciled in a three-quarter point hike. Today, the market expectation is for a full point hike.

The WSJ notes that would be the largest hike since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s.

Author(s): Mike Shedlock

Publication Date: 13 July 2022

Publication Site: Mish Talk

The Asininity of Inflation Expectations, Once Again By Powell and the Fed

Link: https://mishtalk.com/economics/the-asininity-of-inflation-expectations-once-again-by-powell-and-the-fed

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Common sense and practical examples suggest that inflation expectations theory is ass backward.

So much of the CPI is nondiscretionary that it’s difficult to impossible for CPI expectations to matter. 

Yet, economists focus on expectations that don’t matter and ignore the expectations that do matter, namely asset prices!

I have written about this several times previously, two of them before I even found the Fed study supporting my view. 

…..

A BIS study concluded “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.

Indeed, that must be the case as more goods for less money by default improves standards of living.

The Fed was hell bent on reducing standards of living via inflation. Now they struggle to undo the inflation and asset bubble consequences they created. 

The Fed is the problem, not the solution.

Author(s): Mike Shedlock

Publication Date: 25 Jun 2022

Publication Site: Mish Talk

Visualizing the Three Different Types of Inflation

Link: https://advisor.visualcapitalist.com/three-different-types-of-inflation/

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Monetary inflation occurs when the U.S. money supply increases over time. This represents both physical and digital money circulating in the economy including cash, checking accounts, and money market mutual funds.

The U.S. central bank typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The central bank controls the money supply in order to boost the economy or tame inflation and keep prices stable.

Between 2020-2021, the money supply increased roughly 25%—a historic record—in response to the COVID-19 crisis. Since then, the Federal Reserve began tapering its bond purchases as the economy showed signs of strength.

Author(s): Dorothy Neufeld

Publication Date: 16 Jun 2022

Publication Site: Visual Capitalist

By Design, the Fed May Be Tightening Too Much

Link: https://www.wsj.com/amp/articles/by-design-the-fed-may-be-tightening-too-much-11655370001

Excerpt:

The Fed has often moved interest rates by 0.75 percentage point or more in recent decades. But until this week, it had always done so in a downward direction. Indeed, it was a hallmark of Fed policy that it always cut interest rates faster, with less prompting, than it raised them.

…..

This asymmetry reflected the Fed’s perception of risks. If it cut rates too little, the economy might spiral down and the financial system implode. If it cut them too much, inflation might, some years later, rise. Throughout this prepandemic period, inflation was low and, at times, too low, but that wasn’t a big deal. Moreover, during that low-inflation, low-interest-rate era, rates couldn’t fall very much — the Fed called this the “zero lower bound” — so best to act quickly to forestall a downward spiral. If inflation was a problem, there was no limit to how high rates could go.

This philosophy got taken too far. The Fed kept rates too low for too long last year (and the Biden administration enacted too much fiscal stimulus) out of a mistaken belief that inflation was a remote threat compared with prolonged high unemployment.

The result is that risks are now asymmetric in the other direction. Inflation is too high and a self-sustaining wage-price spiral is a real threat. Asked why, after carefully laying the groundwork for a half-point increase, the Fed raised rates by 0.75 point Wednesday, Mr. Powell pointed to an “eye-catching” report that showed long-term inflation expectations rising ominously.

Author(s): Greg Ip

Publication Date: 16 Jun 2022

Publication Site: WSJ

Fed Hikes Rates 75 Basis Points; Powell Says 75 or 50 Likely in July

Link: https://www.thinkadvisor.com/2022/06/15/fed-hikes-rates-75-bps-intensifying-inflation-fight/

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The Federal Reserve raised interest rates by 75 basis points — the biggest increase since 1994 — and Chair Jerome Powell said officials could move by that much again next month or make a smaller half-point increase to get inflation under control.

Slammed by critics for not anticipating the fastest price gains in four decades and then for being too slow to respond to them, Chairman Jerome Powell and colleagues on Wednesday intensified their effort to cool prices by lifting the target range for the federal funds rate to 1.5% to 1.75%.

“I do not expect moves of this size to be common,” he said at a press conference in Washington after the decision, referring to the larger increase. “Either a 50 basis point or a 75 basis-point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting.”

Author(s): Craig Torres

Publication Date: 15 June 2022

Publication Site: Think Advisor

Munis sit on sidelines while USTs rally post-Fed rate hike

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202206151637SM______BNDBUYER_00000181-67cc-d98e-a5fb-efcf1bfc0001_110.1

Excerpt:

Municipals took a backseat as the Federal Open Market Committee announced its decision to implement a three-quarter point rate hike while U.S. Treasuries rallied into late afternoon following the news. Equities rallied.

The move, prompted partly by hotter-than-expected inflation data Friday, is the largest rate hike since 1994.

?Investors appear encouraged that the FOMC is willing to take forceful action to try and get inflation under control,” Wilmington Trust Chief Economist Luke Tilley said.

By front loading rate hikes, he said, the FOMC will have ?more optionality as the year unfolds,? and will be able to accelerate hikes if inflation persists, ?but if any cracks appear in the economic recovery they?ll have the option to slow down while still having rates below their estimate of neutral.?

Triple-A muni yields were cut a basis point or were little changed while UST yields fell up to 23 basis points on the short end.

Author(s): Christine Albano

Publication Date: 15 June 2022

Publication Site: Fidelity Fixed Income