The Fed Will Hike to 4 Percent Come Hell or High Water

September 9, 2022

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6:28 pm

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53 comments

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Economics

Clarida Hell or High Water

Image of Richard Clarida from video below

Credibility Problem and Disconnect

2/3

This perfectly illustrates both the disconnect and huge credibility problem the Fed has.

As the chart below shows, 4% is already priced in. This is not a bold “hell or high water call.” It should be a milktoast statement of the obvious. But it does not seem to be. pic.twitter.com/h16XwjvA4x

— Jim Bianco (@biancoresearch) September 9, 2022

Richard Clarida on Squawk Box

Q: Is the fed data dependent or are they going to 4% come hell or high water.

Clarida Response

I think they are going to 4% hell or high water if I had to put it into two boxes.
Inflation is way too high. Inflation was way too high last year.
Until, inflation comes down, the Fed is really a single mandate central bank.
They are data dependent but the inflation data is too high. So I think they are going to at least 4%.
I agree it’s not a great place to be in. If it was just Putin, you are right. But unfortunately the economy is out of balance now.

Clarida ducked hard questions on the Fed’s role in this mess while admitting he got the inflation picture wrong.

Clarida also supported fiscal stimulus, the last round of which was the big problem.

No one at the Fed saw this coming and they ridiculously kept kept QE going all the way to March of 2022.

So yes, the Fed has an enormous credibility problem and Powell understands that.

As a direct consequence, the Fed is highly likely to make a mistake in the opposite direction.

Meanwhile, the big spotlight appears to be on jobs and the unemployment rate.

Strong Job Gains? Don’t Count On It!

It’s Increasingly Likely That Alleged Job Strength is a Mirage of Part Time Second Jobs

If Unemployment Levels Remain Low, How Far Can the Stock Market Decline?

Here’s the question of the day: If Unemployment Levels Remain Low, How Far Can the Stock Market Decline?

The answer isn’t pretty given The Fed is Openly Cheering the Stock Market Plunge Following Jackson Hole

This post originated at MishTalk.Com.

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53 Comments

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jimeberle

1 year ago

Let’s tune into some interesting statements by former Fed Vice Chair Richard Clarida and his ducking of questions on the Fed’s role in this mess.

link to wikiguide.tips

david halte

1 year ago

Clarida is the perfect example of the Fed’s credibility crisis. Obviously guilty of insider trading, Clarida retired just weeks before his term was to end. Through a miraculous deus ex machina, the Fed’s own internal investigation found Clarida free of culpability. Now, the Fed can wear Clarida like a hat to make these pronouncements.

JackWebb

1 year ago

The Fed and the ECB have destroyed their credibility, and that’s going to hurt for a long time.

prumbly

1 year ago

Seems an odd approach to destroy the economy with high interest rates just to reduce energy demand (and hence energy prices). Surely a far better way would be for our government, such as it is, to voice a clear long-term energy strategy so that companies would dare to invest in ensuring adequate supplies.

RonJ

1 year ago

Reply to prumbly

It was an odd approach to destroy the economy by shutting it down.

Our U.S. government, such as it is, is corrupt. Early on, Covid was treatable. The therapies they proclaimed don’t work, actually do. Dr. Birx, in her book, admitted that she knew the Covid shots didn’t work, before they were rolled out. The shots also are not safe, as they were proclaimed to be.

Mass vaccination is an agenda. Green energy is an agenda. The Great Reset is an agenda. The agenda supersedes all else, including science and common sense.

StukiMoi

1 year ago

Reply to prumbly

“…to voice a clear long-term energy strategy so that companies would dare to invest…”

What killed the once-was West in the first place, was specifically stealing money hand over fist by debasement. In order to then hand the loot to illiterate halfwits who could then “voice long term strategy” and pretend to “invest” and other nonsensical tripe which serve no other purpose than burning through capital built up by prior generations.

It never neither has been, nor ever will be, one of limited, hence appropriate, government’s powers, to “voice clear long term strategies.” Nor any other such form of five-year-planning-by-some-other-moniker. And it sure has heck has never been such government’s appropriate power to rob productive people of all they own by debasement, just to hand the hence stolen loot to the kind of morons dumb enough to believe “investing” stolen “gains” arising solely from debasement theft, has any even possible positive economic effect.

Investment is saving. No more, no less. And savings is withholding from consumption. EXACTLY that which printing money prevents from happening: By allowing the less-than-literate to persist in the illusion that there are more wealth available than there really is. Such that Danny Dimbulb can then “invest” “in a fund”, and expect “gains” which the allows him to save less for retirement. Never mind the moron “managing” “the fund”, as well as the “lawyers” and other leeches feeding off the racket, taking out, and burning, all of it and more i the form of “fees” and “bonuses” in short order.

The economically correct interest rate; the one which maximises actual growth (not imaginary measures-made-up-by-illiterates), is the one which would result from No fed, no printing, no bailouts, no “liquidity” backstops funded by other people’s money. Noone would lend into uncertainty like today’s at anything remotely close to 4% under those conditions. Try 25%. Maybe 50%…..The simple fact that the mountain of US government debt would need to be liquidated before any clarity could possibly ensue; would keep people’s Gold tightly locked up under the mattress, at anything like piddly single digit rates.

And: Since Savings is investment, period: That is exactly what is required for investment, of the real, economically meaningful kind, to take place: Exactly the opposite of what it takes to keep the by-and-for-rank-idiots-only clownshow exemplified by Cramer and Buffet and “Hedge Funds” and “long term strategies” and “ownership society” destructively being artificially perpetuated, at productive people’s expense, for yet another destructive day.

Lisa_Hooker

1 year ago

Reply to StukiMoi

Usually like your comments.

This rant is the most confused, self contradictory, incoherent ramble I’ve ever read here – almost.

Especially liked the “never neither” – is that a double negative or what?

Were you sober when you wrote this?

JRM

1 year ago

Did somebody beat me on my statement of 75 in the Sept hike, here on Mish site???

When all the “EXPERTS” were saying 50!!!!

Now seems the consensus among readers on here!!!

I’ve have not seen a follow up to the “EXPERTS” after their predictions are wrong!!!

omera

1 year ago

I thought, and my understanding of their actions past 20+ years support this, Fed has one lever, the overnight interest rate banks charge each other to control inflation. Pumping money to market is only effective when interest rates are low. Otherwise no bank would want expensive money -hence delicate dance of increasing rates but not too high to cause sudden slow down of whole economy, i.e. “recession”. So inherently Fed has to “dance” of words before actions since their action has only two directions, up or down. I was so upset with Mr. Greenspan while he was chairman. The guy was saying things without saying anything tangible. For a complex beast as inflation, I say up/down interest rate is quite ineffective tool. BTW timing of things even more important when you have only one lever to play with.

JackWebb

1 year ago

Reply to omera

The other lever has been QE, i.e., the Fed buying Treasurys and MBS, something they hadn’t done before the Panic of ’08 at least to my knowledge. The unwinding will not be pretty.

PapaDave

1 year ago

Nice to see that all the experts who complained the Fed would never raise rates again are now complaining that they are raising too fast and too much. Too funny!

MPO45

1 year ago

Reply to PapaDave

There was a human tooth found that is 1.8 million years old. The remarkable thing was a note left next to the tooth that said the Fed raised too much and too fast and they all starved to death.

link to usatoday.com

PapaDave

1 year ago

Reply to MPO45

Lol!

Lisa_Hooker

1 year ago

Reply to MPO45

This is a lie.

That tooth was supposed to be retrieved by the Tooth Fairy, replaced by a shiny new dime.

Back then a dime was enough to buy all of Europe (before inflation).

Apparently the tooth was overlooked.

It is also very apparent that there are a lot of quite modern folks that deeply believe in the Tooth Fairy.

I find no other explanation sufficient.

Captain Ahab

1 year ago

How high will the Fed rate go?

link to assets.zerohedge.com

The Taylor rule ‘prescribes a relatively high interest rate in the situation when actual inflation is higher than targeted’.

PapaDave

1 year ago

Using days like today to lighten up a bit and raise a little more cash. Rates are going to rise and growth is going to slow over the next year. Which is bad for tech, high P/E, companies with a lot of debt, and discretionary.

Oils may get hit a bit, but since they are low P/E, low FCF/EV, low or no debt, high yield, and an essential product, they should do better than almost anything else. Shareholders can just sit back and collect 5-15% dividends.

omera

1 year ago

Reply to PapaDave

who is giving 15% dividends? I am not talking about junk stocks but reliable stable stocks. I see 9% tops and that’s only a few with small market share.

PapaDave

1 year ago

Reply to omera

I wrote this yesterday (based on yesterday’s share prices). Most of these companies have committed to returning more and more of their free cash flow to shareholders as they pay off their corporate debt. Dividend rates are going to continue to go up. I wouldn’t be surprised to see some companies paying over 15% in 2023.

Dividend yields:

GXE: 10%

FANG : 9.3% (regular + special)

TOU: 11.5% (regular + special)

CNQ: 12.9% (regular + special)

FRU: 7.6%

PNE: 6.8%

ENB: 6.4%

WCP: 5%

SGY: 4.8%

SU: 4.7%

Some high yielding oil and gas stocks. Expect all those dividends to go up substantially as companies commit to distribute more of their growing free cash flows.

Some of those companies have already used that cash flow to pay off their debt, and are now buying back shares AND increasing dividends or issuing special dividends. Those that are not yet debt free will be so within a year.

PapaDave

1 year ago

Reply to omera

And I wrote this:

CNQ has started declaring special dividends. So their yield is now 12.9%, based on the most recent quarter. Of course, special dividends are not guaranteed in the future, but with the cash flows these companies are pulling in, they are likely going to go up.

Example TOU

Special dividends for the last 4 quarters have gone up each quarter in addition to the regular dividend of 0.22/qtr.

0.75, 1.50, 1.75, 2.00, ?

I expect the next 2 quarters special dividends to total $5.

worleyeoe

1 year ago

Wait! Hold on! This guy says he was in the Fed’s back pocket screwing the pooch on getting the transitory inflation boondoggle wrong? What? At this point, why should I believe another word out of this guys mouth?

Of course the Fed is going to 4%. What kind of idiotic question is that? Are there still supposed “gurus” out there who think the Fed is on the verge of pivoting? Now 4% is a no brainer. But anything materially above that, say past 4.5%, becomes a real question mark. First, it’s unlikely the Fed will end the year at 4%. 75 this month and then 50 in October takes it to 3.5%. Then, the Fed is likely to pause until early 2023 before hiking again. So 4% comes early next year. At that point, we’ll be a year into rising treasury yields, meaning our interest expense will have started to move up dramatically. With what will be $32T in debt early next year with trillions of it rolling over in 2023-2024, there IS an upper limit to how high the FFR can go which pushes up the yields on bills & notes (2, 3 & 5 year).

This isn’t 1981 when our debt burden wasn’t a noose around the neck of the Fed. Today, it’s rapidly becoming an existential threat to America’s financial stability. At the end of August 2022, we were at $678B for FY 2022 with one more month to go.

Lisa_Hooker

1 year ago

Reply to worleyeoe

Not to worry. Pres Joe will borrow even more money for his Build Back Borrowed program which will provide immense profits that can be taxed to pay off the National Debt completely.

8dots

1 year ago

The Fed provide collateral to the o/n market. The Fed do not fear inflation. It’s worst nightmare is hypo clogging.

Robbyrob

1 year ago

U.S. household wealth suffers record drop in second quarter

link to reuters.com

JeffD

1 year ago

Reply to Robbyrob

After rising a record’er amount over the last two years. This drop is almost a rounding error in comparison. Of course, I’m exaggerating. But not really.

Nuddernoitall

1 year ago

Up 75 basis points in Sept (baked in); up 50BP in November; and up 25BP in December. That gets the rate to 3.75 to 4. I’ve been consistent with these projections. Regarding semantics (i.e., are we in a recession or not), the US economy –the largest in the world — is not homogenous. Why use a one-fits-all label?

Christoball

1 year ago

Reply to Nuddernoitall

Yes some regions are doing better than others. Some industries are doing better than others.

CRS65

1 year ago

Reply to Nuddernoitall

Your projections are very plausible, but the most aggressive plausible path that the Fed can take. I will put an alternative scenario there which I believe is more likely. 50BP in September, 25BP in November, and a 50% chance of 25BP December, but December could also be the beginning of a several meeting pause. The reason that I see this scenario as more likely is that the Fed is flying blind in regard to when the interest rate hikes and balance sheet shrinkage begins to really bite economic activity. Also, MoM CPI is likely to be very tame between now and the end of the year. They will likely determine that their actions and rhetoric has already significantly slowed demand and CPI and that they need to give policy actions time to take hold before plowing forward with more aggressive tighten. If they take your path this will increase the odds that instead of their next phase being a pause, it will have to be abrupt easing in the first half of next year.

Tony Bennett

1 year ago

Not often I agree with Larry Summers, but $US will prove to be the wrecking ball that “breaks” something.

“It’s remarkable that people were saying the dollar’s day was past not very long ago given its current strength,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “My guess is that there’s room for this to continue.”

link to bloomberg.com

Esclaro

1 year ago

Reply to Tony Bennett

Exactly right. No one seems to be talking about the strongest USD in 20 years! Like King Kong it’s going to wreck something big before it’s through.

Captain Ahab

1 year ago

It is reassuring to know the Fed has the economy under control…

CRS65

1 year ago

I doubt that they will get to 4% before a string of MoM CPI prints which show that inflation is on a sub-3% path causes them to pause.

JeffD

1 year ago

As of this week, I believe we entered a recession. Why stocks shot up puzzles me though, unless everyone else also just acknowledged to themselves that this week begins the recession, and falsely believe that the Fed will pivot because of it. They won’t.

Mish

1 year ago

Reply to JeffD

Why this week or does that simply mean that’s when you recognize what I have been saying?

JeffD

1 year ago

Reply to Mish

Consumer confidence only has one way to go — straight down. This leading edge event is what the NBER backdates as the beginning of the recession. I actually don’t think the recession will “appear” until next month, but I am confident it will be backdated to now.

Billy

1 year ago

Reply to JeffD

I think the stock market reads at real-time. If a recession is 2 quarters of negative GDP, it’s then got a 6 month delay. Even these GDP now readings seems to be delayed. Since school started again, I noticed that the stores have been busy again. Booking on my rental picked up over the last 2 weeks. Starbucks was insanely busy this last weekend. Gas is coming down. These are all real-time indicators that I trust more than numbers from the media.

Christoball

1 year ago

Reply to Billy

The old student loan and FASFA boost this time of year and also January.

Tony Bennett

1 year ago

“The Fed Will Hike to 4 Percent Come Hell or High Water”

…

Bring It On

We’ll get to see something you don’t see every day.

10 yr ALREADY inverted with 7 yr note, 5 yr note, 3 yr note, 2 yr note, 52 wk bill, 26 wk bill.

Gunning for 3 mo bill and 1 mo bill.

MPO45

1 year ago

Interest rates, money supply, the positions of the stars, it’s all important but what I want to know is who is going to fix the labor problem? We still have million of boomers heading for the exit door and not enough people to back fill.

I don’t see anyone talking about:

1. Changing social security to allow retired boomers to work without heavily being penalized on social security.

2. Immigration reform of any kind. Every other country is now starting to offer digital nomad visas to entice workers to move there.

3. Changing retirement ages although some companies are starting to do that.

I could go on but why since no one wants to do anything to fix the biggest issue in the economy.

Mish

1 year ago

Reply to MPO45

link to ssa.gov

If you were born January 2, 1960 or
later, then your full retirement age for
retirement insurance benefits is 67. If
you work, and are full retirement age or
older, you may keep all of your benefits,
no matter how much you earn. If you’re
younger than full retirement age, there
is a limit to how much you can earn and
still receive full Social Security benefits.

If you’re younger than full retirement age
during all of 2022, we must deduct $1
from your benefits for each $2 you earn
above $19,560.

If you reach full retirement age during
2022, we must deduct $1 from your
benefits for each $3 you earn above
$51,960 until the month you reach full
retirement age.

The amount that your
benefits are reduced, however, isn’t
truly lost. Your benefit will increase at
your full retirement age to account for
benefits withheld due to earlier earnings.

MPO45

1 year ago

Reply to Mish

We all know a labor train wreck is coming..we all know it but that assumes we want to return to the pre-covid trajectory of how economic growth was during those ‘olden’ days. If we are all happily content to see growth dwindle and contraction from here on out so be it. That would re-affirm my thesis that the U.S. will undergo the “Detroit-ization” of America. It won’t be the rust belt but the rust country, no enough labor to maintain buildings, houses, roads, bridges, electric grid, airports, trains, water/gas lines, etc. The clock is ticking.

Lisa_Hooker

1 year ago

Reply to Mish

SSA Addendum:

If we need more money we might take away some of what we promised you.

Just like we did in 1984.

Lisa_Hooker

1 year ago

Reply to MPO45

Not to worry.

Chemical engineering and computer science candidates are flooding across our southern border.

Just a question of time and education.

Casual_Observer2020

1 year ago

I lost the link but I believe unemployment has to go up to around 6% in order to get inflation under control. I think the Fed will wait until unemployment goes up to around 5% to stop hiking. I see a normal recession now in 1Q and 2Q of 2023. There will be some pain but truth be told we were living in fantasy land since 2017. The economy needs to get back to productivity growth investments. The only way to do this other than rate hikes is more regulation on speculators in derivatives and crypto.

Mish

1 year ago

Reply to Casual_Observer2020

We are not going to see 6% before the Fed blinks or a depression sets in and the Fed declares victory

JackWebb

1 year ago

Reply to Mish

It’s the same choice that Volcker faced in ’79. I tend to agree with your forecast, which means a long period of stagflation ahead. Which I believe is what you’ve been predicting all along. If the Powell = Volcker, the first thing we’ll learn is how diminished the American real economy has become in the last 45 years. No one wants to face up to that set of facts.

Lisa_Hooker

1 year ago

Reply to Casual_Observer2020

American has been living in a fantasy world since 2004-5 when if you could breathe you could borrow money.

Besides, the U-6 unemployment rate was 7.0% in August of 2022.

No one invests in productivity because no one sees any long-term future.

Just selling gadgets on TV for $19.95 with free shipping; maybe even a two-fer if you pay an unmentioned fee.

Tony Bennett

1 year ago

“Clarida ducked hard questions on the Fed’s role in this mess while admitting he got the inflation picture wrong.”

…

Well, he could have been asked an even tougher question.

“On February 27, 2020, one day before Fed Chair Jerome Powell issued a statement regarding the economic response to the COVID-19 pandemic, Clarida traded between $1 million and $5 million out of a bond fund into the equity fund PIMCO StocksPlus. A Fed spokesman responded to Reuters: “Vice Chair Clarida’s financial disclosure for 2020 shows transactions that represent a pre-planned rebalancing to his accounts, similar to a rebalancing he did and reported in April 2019.”[10] On October 4, 2021, Senator Elizabeth Warren requested the Securities and Exchange Commission investigate whether Clarida violated insider trading rules and to look into his “ethically questionable transactions”.[11] When a corrected disclosure revealed that Clarida had sold the same stock fund just three days before his purchase, The New York Times wrote: “the rapid move out of stocks and then back in makes it look less like a planned, long-term financial maneuver and more like a response to market conditions.”[12] On January 10, 2022, Clarida announced he would resign his post on January 14, two weeks before the expiration of his term. The announcement from Clarida did not mention the alleged controversial trading activities.[13][14] He was later cleared of wrongdoing after an investigation from the Fed’s Inspector General.[15]”

link to en.wikipedia.org

KyleW

1 year ago

I learned from you Mish that the credit portion of the money supply is critical. The Fed can’t control what the banks are doing with loans/credit. It looks like a 2nd housing bubble to me. Is this thing going to pop?

Mish

1 year ago

Reply to KyleW

Define “pop”

It already has in one sense.

Existing home sales are down 25% since January.

Price crash?

I don’t know

But the longer prices stay high, the weaker the recovery.

Naphtali

1 year ago

Reply to Mish

I am still waiting for meaningful price reductions in real estate. So far, reductions here in Oregon have been paltry.

Tony Bennett

1 year ago

Reply to Naphtali

Give it time.

We’re in stalemate phase where sales have dropped and inventory still low (but climbing), but prices haven’t dropped (meaningfully).

Inventory low for several reasons. Prices have gone up double digit past few years (with everyone thinking trend would continue). Why sell unless you absolutely needed too? Asset holders trendy thing has been to borrow against assets (everything has and will continue to go up … so they think) to fuel consumption … rather than selling and triggering a taxable event. Plus, the recent spike in mortgage rates keeping folks in place. If you had a 4% mortgage (and not much equity) would you sell and purchase another home with 6% mortgage?

Will take a long grinding recession for prices to drop. I have no doubt this recession will be up to the task.

JackWebb

1 year ago

Reply to Naphtali

I sold a house in Seattle 5 years ago. The buyer put maybe $10K (probably less) into it and stuck it on the market in July at an increase of 68%. Two price cuts since then, and now the ask is now +39%. Still too high, and I won’t be surprised if it winds up being a round trip.

JackWebb

1 year ago

Reply to JackWebb

As Tony Bennett says above, it takes time. The sharpshooters are gone (Zillow, Blackrock, the over-expanded mortgage underwriters) and now it’s more ordinary people going through the stages of grief. Denial is eroding fast. Not a lot of anger, because sellers know how ridiculous their expectations were. Now we’re seeing bargaining, i.e., my house buyer thinking that he has cut the ask enough.

Eventually, he’ll get real, and then he’ll be depressed along with lots of others. Finally, he’ll accept his fate and get out for what he put in but no more. If he’s lucky. This is playing out right now, and it’s going to get much worse.

The Fed Will Hike to 4 Percent Come Hell or High Water

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