The above chart shows the Federal Funds Rate (FFR) vs the yield on various US Treasury notes.
Data is monthly averages except the current point is today.
Long Term Chart
I picked this idea up from Steve Matthews, Bloomberg Business Reporter.
“There is a 50-year history that the Fed never hikes rates once the fed funds rate has risen above the five-year yield. That point could come before the end of 2022, and suggests that it will be very difficult to continue.”
Read that carefully. Matthews did not say the Fed Fund Rate didn’t top the yield on the 5-year note, only that once it did, the Fed stopped hiking.
This can happen by the Fed hiking or longer-term yield falling.
Three Word About Rate Hike Predictions
Three Words: Fade Those Projections!
Last Rate Hike Cycle
Pay particular attention to that last hike cycle as shown above.
Huge inversions started in April of 2019. Those inversions signaled recession well before Covid-19 hit and they started while the Fed was in pause mode, not hiking.
The pandemic did not cause a recession, it only steepened the recession that was about to begin.
Rate Hike Cycles Peak Lower and Lower
It’s the Debt, Stupid!
“There are logical reasons why each FF hiking cycle has “died out” at a lower level than its predecessor since the Volcker era. I’m confident this one will be no different. Advanced economies like ours, Japan’s, Europe’s etc. all in same boat.”
Mike Larson, Senior Analyst at Weiss Ratings, hits the key idea.
I can paraphrase: “It’s the debt, stupid!”
And demographics don’t help.
The market expects 6 or 7 rate hikes this year to about 1.75%. There’s little to no chance of that in my opinion.
Confident of Three Things
I am confident the Fed is hiking into a recession, the asset bubble will burst, and the Fed once again has no idea what is coming.
For discussion, please see James Bullard Says Fed Credibility Is On the Line, Repeats Faster Rate Hike Message
Also see Delusional Fed President Hopes to Steepen the Yield Curve Via QT and Rate Hikes
The yield curve is flattening fast and that will put a top on how far this Fed will hike, inflation or not.
This post originated at MishTalk.Com.
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Mish
Since a good chunk of the inflation is because of the wealth effect caused by the various asset bubbles, and the bubbles depend on ZIRP, I would say we don’t need anywhere near those rates. Even 1% to 1.5% short-term rates (or 4.5% to 5% mortgage rates) can do the job.
example. The Japanese save a greater proportion of their income and keep a
larger proportion in their payment’s system. “Japanese households have 52% of
their money in currency & deposits, vs 35% for people in the Eurozone and
14% for the US.”
Banks don’t lend deposits. Deposits are the
result of lending. I.e., because economists don’t know a debit from a credit,
we will never have high economic growth.
Inflations going to be persistent, even as the economy slows, with the Fed constantly behind the curve in my view. Yields in general will rise keep pushing up so there won’t be a problem with the Fed Funds 5 year spread. Not this year anyway, maybe when there’s a new Fed Governor and they start panicking.