The yield curve flattened across the board following the December 19 FOMC rate hike decision.
Chart Notes
- The December 18 level is from Fred, the St. Lois Fed repository.
- The “Level Today” column is a spot reading at the moment, approximately 1:00 AM central, December 20, 2018.
- The 30-year long bond yield is 2.97% after an extended fake-out trip above 3.0%.
Inversions
- The 5-year is inverted with the 3-, 2-, and 1-year yield.
- The 3-year is inverted with the 2- and 1-year yield.
- The 2-year is inverted with the 1-year yield.
Don’t kid yourself.
Recession is coming. This may be all the signal you get.
I don’t care what the Fed does or says at this point: It’s Too Late to Matter.
Mike “Mish” Shedlock
From a Layman’s perspective it seems Mr. Powell is caught between a rock and a hard place. Powell was likely trying to be the adult in the room by raising rates as expected and giving the market some tough love. What I found particularly interesting was when he said that he didn’t see the balance sheet runoff as causing significant problems. If that were really the case, then why not ramp it up to $100 billion per month runoff and get the balance sheet back down if the economy is so strong?
In my mind it’s delusional to think you are going to drain off $50 billion per month in liquidity and at the same time hike rates. It’s akin to a 50bps hike rather than 25. This is something that Christopher Whalen has mentioned before.
Regardless of what Powell is seeing, looking at, the broader economy is certainly suggesting there are some problems. With the Fed and Treasury being the yin and yang of our corrupt financial machine, they are likely trying to make the best of a bad situation. When push comes to shove, the Fed is neither “independent” or “apolitical”. With so much debt in the system and so much misallocation of capital, there really are no good choices.
Central bankers are a curious lot, operating under the delusion that you could somehow pour trillions of liquidity into a corrupt, predatory financial system and see that money make its way into the real economy for a lasting recovery.
Wolf at Wolfstreet had mentioned (in the comments section) that Treasury might be pressurizing the Fed by selling 2s and 5s rather than 10s and thus putting pressure on 10y yields. Rings true to me. Everyone is now screaming that the Fed should stop now. Actually they should have been screaming when the Fed was holding rates at Zero for close to a decade. It is likely that the Fed is raising rates now because it just has no choice.
Seeing as recent growth has been fueled by a binge on free credit and that kind of growth is not sustainable no matter how free the credit is, a pullback in growth is unavoidable. From that standpoint, as Mish says, recession going to happen no matter what the Fed does.
However, if there is one thing economists seem to agree on, it is that nobody can do much with an economy if it is allowed to turn into a smoking hole in the ground. That is what I do not understand about the Fed’s latest decision to continue hiking when it could have paused to get a better idea if growth will continue to slow at current rates. Did they decide to restrain federal deficit spending without telling anyone?
I tend to think that the only thing the Fed cares about is the unemployment rate. It’s too low and potentially inflationary. So the Fed needs to create a mild recession to push unemployment back up into the 5% – 6% range and take wage pressures off employers. So I expect a mild recession. No “smoking holes” though. Those are caused by bank runs and the Fed has done a good job of re-capitalizing banks to avoid a catastrophe.
But we have had asset inflation for quite a while, so what inflation are you talking about?
If the 30 yr inverts do we start digging foxholes or bunkers?
So the Fed is causing a recession by raising rates?
Now I am REALLY starting to get nervous.