The Market Expects Another Three-Quarter Point Interest Hike in November, Then What?

October 6, 2022

•

5:46 pm

•

According to CME Fedwatch the odds of sharper increases in Fed rate hikes has dramatically accelerated in the last month. The above chart is for the November 2 meeting.

CME Fedwatch Target Rate Dec 2022

CME Fedwatch Target Rate Feb 2023 on 2022-10-06

CME Fedwatch Target Rate Dec 2023

Change From Month Ago

Nov 2022: Month Ago 3.50%-3.75%, Now 3.75%-4.00%
Dec 2022: Month Ago 3.75%-4.00%, Now 4.25%-4.50%
Feb 2023: Month Ago 3.75%-4.00%, Now 4.50%-4.75%
Dec 2023: Month Ago 3.50%-3.75%, Now 4.25%-4.50%

Change Synopsis

The terminal rate is now 4.50%-4.75% up three-quarters of a point from a month ago.
The market expects the Fed to sit 4.50%-4.75% from February until September of 2023.
The market does not expect the first rate cut in 2023 until September.
Then the market expects the Fed to sit on 4.25%-4.50% through the end of the year.

That’s quite a bit of expected additional tightening.

I highly doubt these aggressive hikes will happen, or if they do the Fed can sit on them for a full year.

Interest rate changes and quantitative tightening (QT) operate with an economic lag of six months to a year.

Housing is already broken, yet the market expects the Fed to tighten from the current 3.00%-3.25% to 4.50%-4.75% by February, then hold that for seven months.

Wow.

Job Openings Decline by Over a Million, But What Does It Mean?

In case you missed it, please see Job Openings Decline by Over a Million, But What Does It Mean?

If the Fed really gets to 4.50%-4.75% by February, then holds that for seven months, I may need to re-think my unemployment rate synopsis.

I am certain that 4.75% is more than a bit overshooting.

This post originated at MishTalk.Com

Please Subscribe!

Like these reports? I hope so, and if you do, please Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

If you have subscribed and do not get email alerts, please check your spam folder.

Mish

Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

This post originated on MishTalk.Com

Thanks for Tuning In!

Mish

63 Comments

Newest

Oldest Most Voted

Inline Feedbacks

View all comments

Christoball

1 year ago

There is nothing that would rule out an emergency rate increase before November.

Carl_R

1 year ago

It all depends on how transitory inflation will turn out to be. 4.75% may seem like a high interest rate, yet with inflation at 8%, that’s actually a rate of -3.25%. A “normal” rate would be more like +0.5%. Will inflation drop back to, say, 4.5% and stay there for a year? If so, a rate of 4.75% makes sense. Will inflation rapidly return to the target rate of 2%? If it does, then the rates will be lower than the current projections. Will inflation remain intractable in the 8% range? If that happens, rates will continue to rise, and go higher than 3.75%.

What do I think will happen? I think inflation will fall slowly, back to 6% by next summer, and continue trending lower. Since inflation will be falling the Fed will be content to wait, and not do any more rate hikes, but they won’t want to actually reduce the rate unless . Thus, a rise to 4.5% and then a long period of no changes sounds reasonable to me. Of course, if we get a harsh recession, inflation could dive quickly, in which case we’ll see rate cuts.

worleyeoe

1 year ago

Reply to Carl_R

Reminder: The Fed’s inflation target is based on the lowball PCE data which excludes food & fuel.

They have the luxury of getting two months of data before they make their final decision. PCE peaked in June, and it’s slowly dropping. I don’t see the Fed taking the FFR above 4% this year. I think they’re expecting the data show inflation moderating nicely through the end of the year, which will let them switch over to 25-basis point increases in January. The terminal rate will be 4.5 – 4.75% as predicted by their models where PCE & the FFR meet around next June. The real problem is that PCE may not fall below 4% all next year and under the right conditions could start to tip up again.

The fiscaldata.treasury.gov website dropped the final total annual interest expense for FY 2022 the other day. We’ve gone from averaging $545B over the previous 4 years to $718B for 2022. FY 2023 could easily be $900B. From there, we’ll find ourselves approaching $1T by the time Biden gets out of office if PCE remains persistently above 4% into FY 2024.

Between now and then, there will be a Fed pivot, but they will be forced to lower rates slower than they raised them, keeping pressure on higher than normal treasury yields.

And finally, there will be no real recession without jobs losses and a drop in new & existing home prices of at least 10%.

Melquist

1 year ago

This might be wrong? If retirements in labor market push down unemployment or keep it low, do increased interest rates really need to be done (if that is the trigger) ? Why would the fed not let more time go between increases? I mean an antibiotic course for a human is a few weeks! Trying to cool an economy off from inflation would seem like a bigger course of time between injections of increased rates? Is the economy just digesting the stimuli injections from people saving the Covid checks? Hey I got an ideal, since this is not well known territory, how bad can the fed mess this up

GruesomeHarvest

1 year ago

Then what? Well this time was bound to come. Printing money and giving it to Banksters or rubes doesn’t fix a thing. It just “kicks the can” down the road. It’s either debt deflation or big inflation depending on how they use the printing press. Either way the party appears to be over. Thank God for that! Some good austerity will hopefully bring people back to their senses.

RonJ

1 year ago

“Wow.”

What happens when 190 countries shut down the global economy for a virus that was treatable with anti-viral drugs, before the virus was even known of.

Bill Gates is Mr. Vaccine. The agenda all along was mass vaccination at any cost. We are seeing the devastating result of, at any cost. The CDC obstructed the public from seeing the V-Safe data for 364 days. The CDC has been ignoring the safety signals in VAERS, as well.

The economic damage, the mental damage, the educational damage, the health damage, is massive. For no good reason at all. The repercussions from this public health corruption, are going to last for a long time.

Zardoz

1 year ago

Reply to RonJ

Toot toot! Kook alert!

Salmo Trutta

1 year ago

Volcker pivoted too early in the 1st half of 1980. Will Powell repeat this error?

Tony Bennett

1 year ago

Reply to Salmo Trutta

Staying the course (for now). Two governors (governors always vote. Presidents (except one for NYFRB) vote on rotating basis) spoke yesterday. Message the same. Snip from one:

“In considering what might happen to alter my expectations about the path of policy, I’ve read some speculation recently that financial stability concerns could possibly lead the FOMC to slow rate increases or halt them earlier than expected. Let me be clear that this is not something I’m considering or believe to be a very likely development.”

link to federalreserve.gov

worleyeoe

1 year ago

Reply to Tony Bennett

YES HE WILL!!! The total interest paid on the national debt will be $900B in FY 2023. Our national debt will be $35T by the time Biden’s only term ends. With the Dems in power until January 2025, we’re in for another 2+ years of elevated inflation. I don’t see PCE dropping below 4.25% until DeSantis gets into office.

But, the Fed pivot will not be rapid drops to the FFR. Rather, it will be slow 25-basis points cuts down to about 2.5%. Unless a black swan event brings a steep recession, QE isn’t part of the pivot equation.

Lisa_Hooker

1 year ago

Reply to worleyeoe

So where does this national debt interest go?

Some goes back to the US Treasury and disappears.

A very large pile goes to pension funds that use it for pension checks for not particularly wealthy people.

Some goes into the bank accounts of retirees that hold US treasuries.

Some goes to foreign countries so they can pay for stuff in US dollars.

Did you think it just evaporated completely and went away?

Besides, the Americans can always print more money to pay the current interest due.

vanderlyn

1 year ago

WE HAD DEPRESSION IN 2020 PLAGUE. NOW IT’S BOOM TIMES POST WW2. Economy roaring ahead. The amateurs of course confuse economy with stock market. They never were correlated. Earnings never has had positive statistical correlation with stock prices unless you hold for 15 years or more. It’s all about the money demand printing and reverse of that, and the STOCK of stocks on the shelves to purchase. I think about 90% of investors forget these simple though eloquent truths of history of markets and economics.

GruesomeHarvest

1 year ago

Reply to vanderlyn

There are some similarities. But demographics are very different and the non-US industrial base (China) hasn’t been destroyed. In fact the US industrial base is nothing like it was in the 1940s.

Salmo Trutta

1 year ago

This upcoming hike in rates is a lot like Volcker’s 1st and 2nd qtrs. in 1980. Volcker didn’t understand monetary lags. That was a good time to sell gold.

MarkraD

1 year ago

Reply to Salmo Trutta

Extremely important detail there, the lag, monetary policy is latent.

Captain Ahab

1 year ago

Back in October, 2008, the Fed used its emergency “discount window’ to bail out foreign banks. No one knows how many trillions of dollars went to U.S. and foreign
banks, and companies, all kept highly secret.

I suspect the answer to ‘what’s next?’ hinges on the EU and others. IT depends on how bad things get wrt the energy crisis, the US dollar exchange rate, trade, unemployment, bankruptcies, among other things. You want to be the world’s reserve currency, you also get to be the world’s reserve bank (of last resort). It’s one of those, ‘you break it, you buy it’ things, assuming the US wants allies like Japan and Britain.

Tony Bennett

1 year ago

Reply to Captain Ahab

re Discount Window 2008. Participants were hidden … at first. Eventually, it came out. A lot of non bank participants. I recall GE and Harley Davidson among users. Around 80 or so all told (iirc). I think foreign banks with US operations could tap into Discount Window. What Bernanke did was initiate currency swaps with certain central banks who then in turn used those $$s to bail out their banks. Many might recall Bernanke being grilled / flogged by Congress on where the money went … and did not know. Bernanke was correct. His deal with central banks. Where it went from there not his concern.

Captain Ahab

1 year ago

Reply to Tony Bennett

My ‘discount window’ was to make a point. A precedent has been established for the Fed to go far beyond its mandate. Mish asked, ‘what next?’

My indirect answer:

a) you might never know,

b) it is likely to extend beyond the US.

worleyeoe

1 year ago

Reply to Captain Ahab

Agreed! Europe is in for a world of hurt this winter. Maybe the third La Nina winter in a row will be like springtime. And unfortunately for us, FJB doesn’t want to put America first and make sure our supplies of NG are where they need to be to keep us from seeing a return of $14 Mbtu.

Salmo Trutta

1 year ago

The problem is that the FED doesn’t know that it’s already tightening. Not only does the FED eschew the notion of monetarism, but it also eschews the notion that there is a lag to monetary policy. The FED conflates hiking interest rates with “tightening”. Another hike in the administered rates will come at the same time long-term money flows are already decelerating.

Tony Bennett

1 year ago

Reply to Salmo Trutta

Yes.

Their playbook always the same.

Why I expect 2023 buzzwords to be “disinflation” and “deflation”.

Zardoz

1 year ago

Reply to Tony Bennett

Already in the housing vocabulary.

Christoball

1 year ago

Even with two more .75 rate increases, the Fed rate is historically low for the post Gold Window time frame.

Scooot

1 year ago

Reply to Christoball

Yes it is but so much debt has been priced at lower rates, as it rolls over it’ll be very painful. I realise our mortgage market is not the same as yours but E.g. my sons mortgage is fixed at 1.6% but it’s due to be reset in March. What will it be, double, triple or more? That on top of all the other price rises.

Six000mileyear

1 year ago

The FED could be trying to crash US bonds. Once the yield gets too tempting, USD holders can buy longer term debt pennies on the dollar. Home owners could try to buy their mortgage back at a price lower than the balance from their mortgage holder because of higher interest rates.

Will China be willing to hold US debt as bond prices crash? Doing so would significantly decrease the market value of its portfolio. Selling US bonds increases its USD holdings, which would also lose value due to inflation. Selling USD would strengthen its currency and (in theory) harm its exports.

Maximus_Minimus

1 year ago

Reply to Six000mileyear

The foreign holding of US tresuries have been declining in percentage.

Before QE, a trillion mean something, but the FED alone printed seven trillion, China and Japan hold one trillion each, selling tools, gadgets and some raw materials.

A pittance compared to pro counterfitters.

Lisa_Hooker

1 year ago

Reply to Maximus_Minimus

A trillion here, a trillion there, eventually it becomes noticeable.

Northeaster

1 year ago

The Fed: We have to crash the economy, to save the economy.

Zardoz

1 year ago

Reply to Northeaster

When the car is 10 feet from the brick wall, going 120mph, fixit options are limited…

Scooot

1 year ago

CPI is a long way from 2%. FWIW I think they’ll hike 75bp in November and another 75bp in December, unless CPI is a shock low number. Pivot talk makes it easier for them to hike as stocks and bonds are supported.

Scooot

1 year ago

Reply to Scooot

I meant October & November

Mish

1 year ago

Reply to Scooot

No meeting in October

Nov, Dec, Feb next 3

Scooot

1 year ago

Reply to Mish

Doh, back to Nov & Dec then 🙂

Christoball

1 year ago

Reply to Scooot

It is early November. I believe the 1st and 2nd.

MPO45

1 year ago

The Market Expects Another Three-Quarter Point Interest Hike in November, Then What?

Then bond rates are way more attractive than stocks. I would imagine T-Bills and Treasurys at 4.5% or higher. Why buy dividend stocks when you can get 4.5% guaranteed?

Stocks crashes – Got index PUTS?

Housing crashes – Got housing PUTS or cash to buy rental properties?

Bonds rise – Got cash to buy bonds?

The most exciting time in a decade!

Scooot

1 year ago

Reply to MPO45

“Why buy dividend stocks when you can get 4.5% guaranteed?”

That’s 4.5% nominal yield, not a real yield. The purchasing power of your dollars on each coupon date and on maturity will be less. Dividends on the other hand should grow with earnings. That’s the theory anyway before the Central Banks caused the everything bubble. 🙂

MPO45

1 year ago

Reply to Scooot

should grow with earnings

Yes….should….

I’ll hide out in bonds until January 2024, maybe longer depending on the Fed because those dividend stock will always be there unless they go bankrupt.

Note: I am long *some* dividend stocks…

Scooot

1 year ago

Reply to MPO45

I was just answering your “Why”, I’m bearish on stocks too.

Bonds will also fall if they keep hiking. If Fed Funds were at say 5%, what’s the 10 Year treasury going to be, 4.5%? That’d be roughly a 5.5% drop in its price from todays 3.83% yield. Your Treasury Bills would be ok though.

MPO45

1 year ago

Reply to Scooot

Yeah, I meant bond yields not prices. I don’t trade bonds, I just buy for the yields.

Captain Ahab

1 year ago

Reply to Scooot

To continue my financial market/breastfeeding analogy…

What happens when happily-sucking babies get yanked off the teat? We have yet to see the tantrum phase because the babies think ‘Mom’ is just taking a break. It gets worse with overfed babies, too fat to roll over by themselves, and Mom has a guilt complex because she knows she overfed them for 12 years, and weaning really is past due… but the babies’ screaming is intolerable… and Mom is running out of milk, and the Biden Administration caused those formula supply problems….

‘The most exciting time in a decade’ is about to infinitely louder.

Lisa_Hooker

1 year ago

Reply to Captain Ahab

Well, there’s always Sudden Infant Death Syndrome.

PapaDave

1 year ago

Reply to MPO45

“Why buy dividend stocks when you can get 4.5% guaranteed?”

A couple of reasons.

1. US inflation rate of 8.26%

2. Oil stocks that are already paying 10% dividends, which will go up as they continue to pay down debt, and oil prices continue to go up.

MPO45

1 year ago

Reply to PapaDave

True but.

1. US inflation rate of 8.26% right now and expected to go down.

2. Oil stocks that are already paying 10% dividends, which will go up as they continue to pay down debt, and oil prices continue to go up.

You’ve seen how volatile oil prices can be at the whim of a country cutting production or another one getting the cold shoulder.

On April 20, 2020, oil dropped from $17.85 to -$37.63 during the covid panic. Covid is over but there are other risks.

1. North Korea nuking somebody.

2. Russia nuking somebody.

3. WWWIII starting. This would be good for oil until the governments seize all oil production for war.

4. New plague/virus/health issues

I could go on but you get the point. Ironically, I just read this article about liquidity problems with US Treasurys and the word ‘default’ came up in the article. There may be no place to hide but if US Treasurys go then it’s game over for everyone.

link to finance.yahoo.com

PapaDave

1 year ago

Reply to MPO45

All excellent points. A good debate here. Thanks.

“You’ve seen how volatile oil prices can be at the whim of a country cutting production or another one getting the cold shoulder.”

Correct. Which is why I trade some of the day to day volatility.

But in the longer term (this decade), lack of supply will keep upwards pressure on oil prices and I am very happy to collect good dividends on my core positions.

“On April 20, 2020, oil dropped from $17.85 to -$37.63 during the covid panic. Covid is over but there are other risks.”

Yes. Heck, oil went negative for a couple of days. Anything is possible, particularly in the short term. Which is why you are safer being invested in companies with low cost of production, long reserves, solid balance sheet, little or no debt.

For example, CNQ meets those requirements and can maintain production and base dividends at $28 WTI.

There are always risks (some of which you mentioned). Including a deflationary depression. But another risk is high inflation or hyperinflation. In that case would you prefer treasuries or commodity companies?

Regarding “end of world” scenarios. I don’t worry about them for two reasons. 1. I can’t do anything about them. 2. We are all dead anyway.

Thanks again for the debate.

Captain Ahab

1 year ago

Reply to MPO45

Is the risk of your events 1,2,3,4…

a) additive

b) multiplicative

c) unimportant

Imagine, there is a liquidity problem with US T’s. Note how Britain caved when the gilts hurt the pension funds.

12+ years of Fed subsidized interest rates is the problem. Lots of low interest rate debt from govt and private– a huge timebomb about to go boom, IMHO and it is global.

Lisa_Hooker

1 year ago

Reply to MPO45

-$37.63

Is only a gambler’s bet on the table.

Would someone please provide a list of entities that took physical delivery of oil at -$37.63.

Even a very short list would be OK.

xbizo

1 year ago

Inflation will still be over 5%. Unemployment will still be historically low. GDP +1%. Why would the two-trick Fed stop raising? (Except that they should know better about the lag between policy change and effect)

PapaDave

1 year ago

Higher interest rates affect some more than others. Personally and in business.

That is one of the reasons to invest in companies that are gushing cash flow and paying off their debt.

Looking forward to receiving 10% to 20% dividends from some of these low debt companies annually over the next few years.

Tony Bennett

1 year ago

Rocky, er, $US picks themselves off the mat … once again.

dxy > 112

usdjpy > 145

Salmo Trutta

1 year ago

I’m with you Mish. The FED will tighten too fast with a 3/4 point hike.

Link:
Daniel L. Thornton, Vice President and Economic Adviser: Research Division,
Federal Reserve Bank of St. Louis, Working Paper Series:

“Monetary
Policy: Why Money Matters and Interest Rates Don’t”

Thornton:
“the interest rate is the price of credit, not the price of money”

Using
a price mechanism, pegging rates, to ration Fed credit is non-sense (“a price
mechanism is a system by which the allocation of resources and distribution of
goods and services are made on the basis of relative market price”).

Salmo Trutta

1 year ago

Reply to Salmo Trutta

The
effect of current open market operations on interest rates is indirect, varies
widely over time, and in magnitude. What the net expansion of money will be, as
a consequence of a given change in policy rates, nobody knows until long after
the fact. The consequence is a delayed, remote, and approximate control over
the lending and money-creating capacity of the banking system.

Tony Bennett

1 year ago

Reply to Salmo Trutta

Yep.

Federal Reserve only sets the overnight rate. Mr Market controls the yield curve (which Federal Reserve massages with QE / QT).

If looking for proof, look no further than 30 year bond. Yield inverted all along the curve to 6 month T bill.

Salmo Trutta

1 year ago

Reply to Tony Bennett

Yes, some money market rates are higher than longer-dated rates.

Resource Center | U.S. Department of the Treasury

Interest rate inversions cause nonbank disintermediation, where the banks outbid the nonbanks for loan funds. The opposite scenario cannot exist. It is a backwards policy. And ABCT is therefore incorrect.

Scooot

1 year ago

Reply to Tony Bennett

Mr Market only controls it if it chooses a yield that the Fed is reasonably happy with. If Mr Market gets concerned you only need to look at Gilts to see what might happen. Then the Fed would have to step in again.

GruesomeHarvest

1 year ago

Reply to Salmo Trutta

But, if I have access to credit I have access to money. Not sure what distinction you’re trying to draw.

KidHorn

1 year ago

The FED was like someone who ate at McDonalds every day. Became obese. Thought it wouldn’t be a problem since they felt fine. And then had a coronary and realized they needed to start eating broccoli instead of fries.

Tony Bennett

1 year ago

Reply to KidHorn

Yes.

Policy Error made coming out of GFC. Not now.

Lisa_Hooker

1 year ago

Reply to KidHorn

The FED is like a vegetarian who eats at the natural food restaurant every day. Became obese. Thought there couldn’t be a problem. Then had a coronary and realized that eating too much tofu and broccoli with soy sauce (or anything else) can kill you. It’s the calories and sodium not the sign out front.

MarkraD

1 year ago

Peek at the Fred chart of inflation adjusted hourly wages, knowing the Fed cutting rates for 40+ years has induced consumption in lieu of real wage growth – I’m cringing, despite the recent rate of increase for wages.

If inflation doesn’t abate, we’re screwed.

I’m worried the Fed’s going to fast.

Zardoz

1 year ago

Gonna need soldiers soon, and nobody wants to be a soldier if better paying work is available.

TPTB don’t like sassy serfs, and the labor market has mad the serfs super sassy. The hammer will come down.

bobcalderone

1 year ago

Reply to Zardoz

Not trying to be alarmist, but TPTB should remember that many of the sassy serfs are well-armed…

Zardoz

1 year ago

Reply to bobcalderone

They got predator drones, HIMARS, and aircraft carriers?

Lisa_Hooker

1 year ago

Reply to Zardoz

Oh, I don’t know.

Not many jobs give you a license to kill.

The Market Expects Another Three-Quarter Point Interest Hike in November, Then What?

Share this:

Recommended Articles

Stay Informed

Subscribe to MishTalk