patrick.net

The 10 year UST is now over 4%. Do I hear 5?

https://www.cnbc.com/2023/03/06/stock-market-today-live-updates.html

Dow falls 200 points as Powell says rates are headed higher than expected

The comments seemed to suggest that the Fed may implement a larger rate hike than last month’s 25 basis point increase at its next policy meeting on March 21-22.

Market views on what's next for the benchmark fed funds rate have been whipped around recently. The Fed earlier this month appeared set to deliver a rate hike of 25 or 50 basis points, its ninth consecutive increase, as it deals with inflation sitting well above its 2% target.

Traders then began pricing in a possible pause for March after the collapse and seizure of Silicon Valley Bank fanned fears about a broader crisis in the banking sector.

Heading into Wednesday's decision, odds were tilted again toward an increase of 25 basis points in the fed funds rate, to a range of 4.75%-5%.
…………..
A pause would make people think the Fed has lost interest in fighting inflation. On the other hand, an increase of 50 basis-points is too much for some banks to handle at this point.

https://markets.businessinsider.com/news/stocks/svb-collapse-federal-reserve-meeting-interest-rates-bank-crisis-2023-3?op=1

Inflation varies widely between places. It should be 10% in the silly con valley for the last few years. In 3y, 1.1^3=33% and double in 7y unless there is a lot of productivity to offset. Cash is trash as long as (massive) QE is on in various forms including bank bailouts.

Blue says

Inflation varies widely between places. It should be 10% in the silly con valley for the last few years. In 3y, 1.1^3=33% and double in 7y unless there is a lot of productivity to offset. Cash is trash as long as (massive) QE is on in various forms including bank bailouts.

The workforce culture is what has a lot of effect on productivity and innovation. I recall the 1990s and the culture was do-more-with-less, total quality management, six sigma, Toyota Production System, etc. Yes we had "diversity Thursdays" where we had some form of political correctness training.

So they could jack of interest rates but costs may not go down because the quality of the workforce sucks or is more third world, including the executives (such as at silicon valley bank) are overpaid Woke operatives.

But now I heard all of that like culture emphasis on total quality management (TQM) has been shelved and has disappeared whereas it is all about ESG and DEI.

I wonder if DEI and ESG can co-exist with the culture of TQM and Six Sigma as well as "strive for excellence"

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https://www.cnbc.com/2023/03/17/fed-poised-to-approve-quarter-point-rate-hike-next-week-despite-market-turmoil.html

Fed poised to approve quarter-point rate hike this week

https://finance.yahoo.com/news/a-fed-pause-could-do-more-harm-after-banking-crisis-morning-brief-093017739.html

A Fed pause could do more harm after banking crisis

Stock market news today: Stocks slide with all eyes on Fed meeting
Here's what's moving markets on Wednesday, March 22, 2023.

The Fed releases its decision and economic projections at 2 p.m. ET, and Powell gives a statement and takes questions starting around 2:30 p.m. ET.

“Powell’s challenge in the press conference will be to maintain focus on fighting inflation while signaling flexibility in how they deal with the banking crisis,” Michael Feroli, Chief U.S. Economist at JPMorgan, wrote in a note to clients.

https://finance.yahoo.com/news/stock-market-news-today-live-updates-march-22-2023-123738540.html

https://finance.yahoo.com/news/federal-reserve-interest-rate-decision-monetary-policy-march-22-164807780.html

Federal Reserve raises interest rates 0.25%

The rate hike brings the Fed’s policy rate, the federal funds rate, to a new range of 4.75% and 5%,

https://www.cnbc.com/quotes/US3M

3 month Tbill rates over 5%

zzyzzx says

3 month Tbill rates over 5%

Yield curve is inverted, not normal :-(
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I saw today's CPI report.

12 month inflation or CPI is 5%. It was 6% last month.

CPI went up 0.4% from last month, mostly driven by housing costs. Egg prices and gas went down.

Economists were expect 5.2% and 0.2% (not 5% and 0.4%).

So now CPI is not greater than the Fed Funds rate, which is 5%.

When CPI gets below 1% of the Fed Funds rate, then there is enough margin to consider that real interest rates are positive.

Go back to Obama admin when 7 out of 8 years the Fed Funds rate was 0.25% and annual inflation was average around 1.5%.

A vast majority of Obama's terms were during negative interest rates.
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With CPI dropping to 5% and equal to the Fed Funds rate, seems like the Federal Reserve will cap the Fed Funds rate to 5.25% or 5.5%.

Granted the monthly change was +0.4% from February to March 2023, but inflation seems to be more under control.
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ad says

12 month inflation or CPI is 5%

That explicitly omits rents and fuel.

HeadSet says

ad says

12 month inflation or CPI is 5%

That explicitly omits rents and fuel.

Lol! They always ignore items that are outside certain ranges. Not so useful in general.

HeadSet says

That explicitly omits rents and fuel.

No, it is the overall CPI which obviously includes rent, energy, and food. Overall CPI (i.e., inflation for last 12 months) is 5%.

I believe you may be thinking of the core CPI which omits food and energy.

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ad says

I believe you may be thinking of the core CPI which omits food and energy.

True, but it is that core CPI that went up over 5%.
But core prices, which exclude volatile food and energy items and capture longer-lasting trends, increased 0.4% from February following a 0.5% bump in the previous month. That pushed up the annual increase from 5.5% to 5.6%.
https://www.usatoday.com/story/money/economy/2023/04/12/cpi-inflation-data-today-live-updates/11607115002/

HeadSet says

True, but it is that core CPI that went up over 5%.

Yes, but overall CPI is 5%. For me, overall CPI has more of an impact on my household finances.

Core CPI is just a large aggregate or component of overall CPI.

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https://finance.yahoo.com/news/feds-mester-says-rates-need-to-rise-above-5-reserves-judgement-for-next-policy-meeting-220555377.html

Fed’s Mester says rates need to rise above 5%

Interest rates need to be 12%, that would put an end to $35,000 starter cars with 72 month payment schedules. .

Tenpoundbass says

Interest rates need to be 12%, that would put an end to $35,000 starter cars with 72 month payment schedules. .

Problem is if they were able to sell them at that price, they'll keep trying.... and so will the buyers. We're in a tricky period that I don't claim to understand. I think most auto buyers without means/income are probably already paying close to 12%. Obviously shit credit buyers are paying way more. But someone with a 620-40 middle score is for sure at 12%.

WookieMan says

Problem is if they were able to sell them at that price, they'll keep trying.... and so will the buyers

Yet still another case where stupid people willing to overpay ruin it for everyone. The banks are supposedly wising up and not giving out loans at excessive LTV, meaning you can't borrow 160% of the price of the car any more.

up another .25%

zzyzzx says

up another .25%

The Fed Funds rate is now between 5% and 5.25% and at 1990's levels.

It will be interesting to see how GDP and unemployment fares over next 6 months considering that for 7 out of 8 years during the Obama Administration the rate was at 0.25%.

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Grab some 13 week and 6 month US Treasuries and sit back and collect 5%/year, risk free.

$1 million invested means $50,000 in passive annual income, not bad for sitting on your ass, downing Margaritas, and munching on carnitas tacos.

Al_Sharpton_for_President says

Grab some 13 week and 6 month US Treasuries and sit back and collect 5%/year, risk free.

$1 million invested means $50,000 in passive annual income, not bad for sitting on your ass, downing Margaritas, and munching on carnitas tacos.

Yeah, cause everyone's got a million dollars. I'm going to assume if someone has a million dollars, 50k ain't too exciting.

I'm not buying bonds but I probably should at my stage of life.
I'm probably going to start changing my growth stock funds to dividend style funds.
I just like capital appreciation funds.

GNL says

Yeah, cause everyone's got a million dollars.

I'm guessing that pretty much every here has at least that much.

zzyzzx says

GNL says

Yeah, cause everyone's got a million dollars.

I'm guessing that pretty much every here has at least that much.

Wow, that is pretty amazing. I'm running with a high brow crowd then.

GNL says

Wow, that is pretty amazing. I'm running with a high brow crowd then.

Ain't you one of those with that kind of bread?

No

clambo says

I'm not buying bonds but I probably should at my stage of life.

Check out Vanguard Bond ETF (ticker: BND). It dropped about 23% from peak set in 2020.

I think BND will return to 2020 levels once interest rates settle.

Federal Reserve has the Fed Funds rate around 5.25% which is where it was for most of the 1990s. I think they may increase it one more time to 5.5% but I don't expect anything more than that.

Prime rate for various loans like home equity loans are set usually at 2% above the Fed Funds rate; I don't think the Fed wants to completely tighten credit availability. Look at M2 money supply chart as it has fallen off the cliff recently.

Inflation is measured various ways, as Personal Consumer Expenditure and Consumer Price Index.

PCE is more comprehensive than CPI, such as it also accounts for non urban consumers.

Core PCE (excludes food and energy) = 4.6% for last 12 months

PCE (includes food and energy) = 4.2%

CPI = 5%.

The Fed Funds rate now is 5.25% and greater than inflation (CPI and PCE). This will help to keep prices in check. I noticed egg prices have dropped a little.

Below is provided by Wolfman at Wolf Street website. It shows when core PCE is above the Fed Funds rate such as during Obama's 8 years in office.



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Will they continue to raise rates?

GNL says

Will they continue to raise rates?

I hope so.

HeadSet says

GNL says

Will they continue to raise rates?

I hope so.

It seems perfectly sensible to wish for higher rates. Everyone is effected by inflation.

GNL says

Will they continue to raise rates?

Expecting the federal reserve to do what's right is just plain silly. If they were doing the right things overnight rates would be much higher than they currently are.

It's not so much Americans and American companies that are getting slammed by higher rates (don't worry plenty will go BK).

It's really funny to watch the foreigners squirm. You see there's about 15 trillion in dollar denominated debt owed by foreign entities. Most of this is short term debt. The Fed raised rates about 5% over the last year. There's just no way to come up with an extra $750 billion per year. Everyone is trying to extend and pretend, but sooner or later, lenders just ain't gonna lend billions of extra dollars to people, companies, governments, etc.

The defaults will be spectacular.