The Fed’s Preferred Measure of Inflation Jumps to 6.6%, a 40-Year High

Link: https://mishtalk.com/economics/the-feds-preferred-measure-of-inflation-jumps-to-6-6-a-40-year-high

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The PCE price index for March increased 6.6 percent from one year ago, reflecting increases in both goods and services. 

Energy prices increased 33.9 percent

Food prices increased 9.2 percent. 

Excluding food and energy, the PCE price index for March increased 5.2 percent from one year ago.

Author(s): Mike Shedlock

Publication Date: 30 April 2022

Publication Site: Mish Talk

The Fed Is ‘Normalizing.’ Here’s What Public Financiers Need to Know.

Link: https://www.governing.com/finance/the-fed-is-normalizing-heres-what-public-financiers-need-to-know

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Of the $8.3 trillion of liquid marketable securities in the Fed’s portfolio (see the chart below), 37 percent are overnight repos and Treasury securities maturing in one year or less, 26 percent are T-notes maturing in one to five years, and another 30 percent are mortgage-backed securities issued by Fannie Mae and Freddie Mac, which pay down principal and interest monthly. So all it takes to pull back the excessive monetary stimulus left over from the COVID-relief era is to let such holdings roll off in 2022-24 without replacing them with new purchases. Operationally, it’s really not rocket science — it’s just a matter of conviction and messaging. Unlike the rising stairstep expected in the Fed’s overnight rates, its bond portfolio runoff won’t make nightly news headlines; it’s like watching paint dry. In this regard, doing nothing is actually doing something quite constructive on the inflation front, despite the lack of fanfare.

What would be the impact on interest rates? Little doubt they must go higher, barring an exogenous shock like a global virus lockdown or a Ukraine-war flight-to-safety. The key question is really how much higher, and how fast. My best guess is that markets have recently discounted about one-third of the potential move higher in long-term rates.

Author(s): Girard Miller

Publication Date: 15 Feb 2022

Publication Site: Governing

Investors Sour on Muni Funds

Link:https://www.wsj.com/articles/investors-sour-on-muni-funds-11643568253

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Investors pulled $1.4 billion from municipal-bond funds in the week ended last Wednesday, the biggest weekly outflow since the early days of the pandemic, according to Refinitiv Lipper.

Municipal-bond yields, which rise as prices fall, climbed last week after the Federal Reserve signaled it would begin steadily raising interest rates in mid-March, reducing the appeal of outstanding debt. Yields on the highest-rated state and local bonds jumped to 1.55% Monday from 1.34% last Tuesday, according to Refinitiv MMD.

Returns on the S&P Municipal Bond Index have fallen to minus 2.33% this year through Jan. 28, counting price changes and interest payments, the lowest year-to-date returns in at least 16 years.

Author(s): Heather Gillers

Publication Date: 31 Jan 2022

Publication Site: WSJ

Developing Countries Brace for Impact From Fed Rate Increases

Link:https://www.wsj.com/articles/developing-countries-brace-for-impact-from-fed-rate-increases-11644321780

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Central bankers in developing countries have been ratcheting up interest rates for months, seeking to stay ahead of a rise in U.S. rates that could destabilize their economies by pushing up their own cost of debt, weakening their currencies and driving capital out of their markets and into higher-yielding U.S. securities.

Now, the Fed is expected to raise rates anywhere from four to seven times this year. If successful in taming inflation, the Fed could help central banks everywhere, because a turbocharged U.S. economy, huge government stimulus and a splurge by Americans on everything from toys and household appliances have snarled supply chains and driven inflation higher world-wide.

Until now, overseas central banks have found it difficult to get on top of the inflation surge withthe Fed sitting on the sidelines. But with the Fed now poised to join the battle, some say the prospects of success are greater.

Author(s): Paul Hannon

Publication Date: 8 Feb 2022

Publication Site: WSJ

Life and Annuity Issuers Watch for Interest Rate Hike Sunshine

Link:https://www.thinkadvisor.com/2022/02/04/life-and-annuity-issuers-watch-for-interest-rate-hike-sunshine/

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Executives are hoping that Fed interest rate increases could increase the yields on insurers’ huge investment portfolios.

Higher rates could be a good thing for Prudential, the company’s vice chairman told analysts.

MetLife’s CEO said higher short-term rates could mean a flatter yield curve that would be less favorable to life insurers.

Author(s): Allison Bell

Publication Date: 4 Feb 2022

Publication Site: Think Advisor

Why Interest Rates Could Drive a Debt Crisis

Link:https://www.nationalreview.com/2022/02/why-interest-rates-could-drive-a-debt-crisis/

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The average interest rate paid by Washington on its debt has fallen from 8.4 percent to 1.5 percent over the past three decades. However, economic variables tend to fluctuate, and only a fool would assume that a current economic trend will last forever. In the past, economic forecasts and markets told us that high inflation and high unemployment cannot happen simultaneously, that the late-1990s tech-stock bubble wouldn’t burst, and that national housing prices can never fall. Just last year, the Federal Open Market Committee consistently underestimated current-year inflation by three full percentage points. Interest-rate forecasts have proven spectacularly wrong for 50 years.

But now, economic commentators assure us that soaring federal debt is affordable because interest rates will remain low forever.

By contrast, the Congressional Budget Office projects that rates will nudge up to 4.6 percent over three decades. That is easily possible. After all, a broad range of studies show that the projected 100 percent of GDP increase in federal debt over the next three decades should, by itself, add three percentage points to interest rates. Added federal debt over the past 15 years also put upward pressure on interest rates, but this was offset by low productivity, baby-boomer savings, and Federal Reserve policies that pushed rates downward. For interest rates to remain low, those offsetting factors would have to accelerate much further to counteract the three-percentage point effect of future debt.

Author(s): Brian Riedl

Publication Date: 4 Feb 2022

Publication Site: National Review

A Politicized Fed Endangers the Economy

Link:https://www.wsj.com/articles/a-politicized-fed-endangers-economy-monetary-federal-reserve-powell-balance-sheet-climate-stress-test-social-justice-11642448983

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It is time to depoliticize monetary policy. First, instead of making the Fed’s mandate broader, Congress should consider narrowing it to one of price stability. The Fed’s contribution to achieving full employment should be through focusing on long-term price stability. Next, as we learn to live with Covid and as the economy continues to recover, the Fed must go beyond merely tapering its bond purchases. It must set out a credible process and timetable to unwind its balance sheet.

Should the Fed be called on again to exercise emergency powers, Congress must ensure those powers are of limited duration and that any credit facilities created are quickly transferred to the Treasury Department. Finally, the more improvisational and discretionary the Fed’s conduct of monetary policy, the more difficult it is to withstand political pressures. The Fed should move to a monetary-policy framework that is more systematic, predictable and transparent.

If politicized monetary policy doesn’t prove transitory, it is doubtful the Fed will be able to deliver either stable prices or maximum employment.

Author(s): Jeb Hensarling

Publication Date: 17 Jan 2021

Publication Site: WSJ

In Absolute and Percentage Terms, Consumer Credit Jumps the Most Ever

Link:https://mishtalk.com/economics/in-absolute-and-percentage-terms-consumer-credit-jumps-the-most-ever

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The monthly credit increase of $39.99 billion was the biggest jump ever. 

Revolving credit surged by $19.84 billion, the most ever.

The month-over-month percentages rose by the most ever.

New outstanding total in nonrevolving credit.

Author(s): Mike Shedlock

Publication Date: 8 Jan 2022

Publication Site: Mish Talk

The Fed Delivers a Baby, Gold Jumps

Link: https://mishtalk.com/economics/the-fed-delivers-a-baby-gold-jumps

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The Fed Delivers a Baby

Actually, it was obvious 7 months ago that it was time to move away from “emergency” conditions.

The Fed decided to deliver a baby instead. 

In two more months, the Fed will finally finish tapering. Then we see what kind of baby steps the Fed makes. 

Author(s): Mike Shedlock

Publication Date: 11 Jan 2022

Publication Site: Mish Talk

Bond Yields Surge to Start 2022, What’s Ahead?

Link: https://mishtalk.com/economics/bond-yields-surge-to-start-2022-whats-ahead

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I find the prospect of 7 rate hikes in 2022 more than a bit amusing.  Here’s a good way of looking at things.

0 to 2 hikes: 33.8%

3 hikes: 30.2% 

4 or more hikes: 36.0%

The median projection is now a bit more than 3 hikes this year. 4 and 2 rate hikes are at nearly equal odds, but 5, 6, an 7 hikes rated a combined 13% vs 0 to 1 hike at a combined 10.8%

The change in rate hike odds today reflect the surge in yields that also happened today.

Author(s): Mike Shedlock

Publication Date: 3 Jan 2022

Publication Site: Mish Talk

The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed

Link:https://www.politico.com/amp/news/magazine/2021/12/28/inflation-interest-rates-thomas-hoenig-federal-reserve-526177

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In May of 2020, Hoenig published a paper that spelled out his grim verdict on the age of easy money, from 2010 until now. He compared two periods of economic growth: The period between 1992 and 2000 and the one between 2010 and 2018. These periods were comparable because they were both long periods of economic stability after a recession, he argued. The biggest difference was the Federal Reserve’s extraordinary experiments in money printing during the latter period, during which time productivity, earnings and growth were weak. During the 1990s, labor productivity increased at an annual average rate of 2.3 percent, about twice as much as during the age of easy money. Real median weekly earnings for wage and salary employees rose by 0.7 percent on average annually during the 1990s, compared to only 0.26 percent during the 2010s. Average real gross domestic product growth — a measure of the overall economy — rose an average of 3.8 percent annually during the 1990s, but by only 2.3 percent during the recent decade.

The only part of the economy that seemed to benefit under quantitative easing and zero-percent interest rates was the market for assets. The stock market more than doubled in value during the 2010s. Even after the crash of 2020, the markets continued their stellar growth and returns. Corporate debt was another super-hot market, stoked by the Fed, rising from about $6 trillion in 2010 to a record $10 trillion at the end of 2019.

Author(s): Christopher Leonard

Publication Date: 28 Dec 2021

Publication Site: Politico

Omicron Is an Economic Threat, but Inflation Is Worse, Central Bankers Say

Link:https://www.nytimes.com/2021/12/16/business/economy/omicron-inflation.html

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Facing surging inflation, three of the world’s most influential central banks — the Federal Reserve, Bank of England and European Central Bank — took decisive steps within 24 hours of each other to look past Omicron’s economic uncertainty.

On Thursday, Britain’s central bank unexpectedly raised interest rates for the first time in more than three years as a way to curb inflation that has reached a 10-year high. The eurozone’s central bank confirmed it would stop purchases under a bond-buying program in March. The day before, the Fed projected three interest rate increases next year and said it would accelerate the wind down of its own bond-buying program.

….

Aside from Omicron, the central banks were running out of reasons to continue emergency levels of monetary stimulus designed to keep money flowing through financial markets and to keep lending to businesses and households robust throughout the pandemic. The drastic measures of the past two years had done the job — and then some: Inflation is at a nearly 40-year high in the United States; in the eurozone it is the highest since records began in 1997; and price rises in Britain have consistently exceeded expectations.

….

The Federal Reserve and Bank of England are worried about the persistence of high inflation. For the European Central Bank, inflation in the medium term is too low, not too high. It is still forecasting inflation to be below its 2 percent target in 2023 and 2024. To help reach that target in coming years, the central bank will increase the size of an older bond-buying program beginning in April, after purchases end in the larger, pandemic-era program. This is to avoid “a brutal transition,” Ms. Lagarde said.

Author(s): Eshe Nelson

Publication Date: 16 Dec 2021

Publication Site: New York Times