As expected, the Fed hiked interest rates 25 basis points to a range of 3/4 to 1 percent. Minneapolis Fed president Neel Kashkari dissented. Kashkari voted to hold rates steady.
Here are snips from the FOMC March 15 Statement.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Gundlach Says Bond Market Set to Rally as Fed Raises Rates
There is nothing extraordinary in this report. Everything is as expected.
Bloomberg reports Gundlach Says Bond Market Set to Rally as Fed Raises Rates.
The bond market is poised for a short-term rally as the Federal Reserve enters a series of interest rate hikes that will moderate inflation, Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital, said on CNBC.
“I think the bond market is set up for a rally coming up in the weeks ahead,” Gundlach said.
Yields on 10-year Treasuries are likely to head back down as inflation moderates later this year, Gundlach said.
“With that movement, that supports a bond market rally,” he said.
Yield Curve Discussion
If the Fed keeps hiking, the short end of the curve will get clobbered. The long end of the curve is another matter.
I agree with Gundlach that inflation, as measured by the CPI, will slow. Much of the CPI rise year-over-year is against very low comparisons, led by a rise in energy. Energy prices have stalled, if not reversed.
The economic reports have not been as strong as they look. For discussion, please see:
- Retail Sales Rise 0.1% in February, January Revised Higher, Auto Sales Decline: Spotlight on Weather and Seasonal Adjustments
- Crude Dips Below $48.00 First Time Since November 29: CPI Where to From Here?
I expect the yield curve to flatten with short-term yields rising and long-term yields declining. If the Fed keeps hiking, the curve will invert.
Mike “Mish” Shedlock
Don Last said:
And the Trump team sits on its hands while the curve inverts signalling possible recession. Thank you Democrat Yellen. Next up – Fed audit.
Stuki Moi said:
Trump won’t audit. He’ll just put more ex Goldmanites like Kashkari on the board. Telling the uncritical dittoheads that those guys are “private sector” and “business men.”
The game is always to not raise rates, as what made the current ruling class wealthy, is printing, borrowing and low rates. When it all goes to hell during a GOP administration, the dems come in and bring in “economists” who say “we need lower rates” to “support the poor.” Then, when it still goes to hell, the GOP comes back and says “we need lower rates,” because that’s what the so called “business men.” In reality, it’s one party. The Goldman party. Goldman Sachs makes just as much money off of the public sector as the nominally private one. So they don’t care, as long as money is being printed up and handed to them, at the expense of the rest.
What we need is 7-20% interest rates for the next 300 years. But that doesn’t directly aid the connected in robbing the less so, so that’s not what we get. Since being destitute broke, robbed, and without influence, is rarely the path to high public office.
Conscience of a Conservative said:
When one year T-bill yields 1%, which is under the rate of inflation, there’s no question rates are too low. We should not have negative real interest rates in this economy.
The Fed is FIVE+ YEARS behind the curve.
That is why they are in a panic now – with GDP growth slowing to 0.9% – to get as far off the zero bound as they can, before the next recession hits.
The market had already hiked rates and the Fed was behind the curve,
They had no choice if they wanted to maintain a ‘semblance’ of credibility.
James Greenberg said:
How has this affected the mortgage markets? What has been the effect on the 10-year Treasury?
Bone Fish said:
Jack Wayne said:
If the Fed raises twice more this year, they will be making the same mistake as Greenspan. And I think they will have the same result – a drop in economic activity if not a recession. I think that a single additional raise in the October frame is all that is needed. And that’s more to help the Fed have some room on rates if things crater. My preference would be to see 3%+ of growth before raising rates.
Tony Bennett said:
“My preference would be to see 3%+ of growth before raising rates”
IMO, we won’t see – sustained – 3% growth until a (hard) recession clears out the dead underbrush that is currently holding back the economy.
Japan the model for ZIRP/NIRP = Zombified Economy
Trader Joe said:
It not a a mistake…it’s the plan…same as when Greenspunk killed the markets in 2008 so that Lehman, Wachovia, Bear Sterns, et. al. could be sold off the the highest…err…lowest bidder. Was, Rinse, Repeat.
john clark said:
As the late economist Jim Morrison observed “been down so long it looks like up to me”. The Fed feels forced to do something in reaction to meh economic numbers. I guess stagflation is preferable to the existential threat of exploding federal deficits driven by spiking borrowing costs to support guns and butter.
Yippee 1%. Now rates are only negative 1% real.
Tony Bennett said:
“I expect the yield curve to flatten with short-term yields rising and long-term yields declining. If the Fed keeps hiking, the curve will invert.”
Written in Stone
Tony Bennett said:
“Yields on 10-year Treasuries are likely to head back down as inflation moderates later this year, Gundlach said.”
but but but The Trump Reflation … Billionaire Stanley Druckenmiller’s call for the 10 yr yield to hit 6% …. soon …
If the 10-year yield ever got more than halfway to 6%, the entire credit-dependent economy would implode into a smoking, smoldering heap within a month.
Todd Fisher said:
Some people here get it, while others still don’t. I listed to Jim Rickards and Gerald Celente today, both echoing the same as others here. They are only raising rates so they can lower them by summer 2018. They are NOT raising because the economy is booming. And, since when did the Fed care about inflation? The last Fed president who really cared about inflation was Volcker, and that was 20 years ago. They will likely get to 2% funds rate, but they will be talking negative funds rate by 2020. Guaranteed! It’s a mathematical certainty. A 3% funds rate would push the interest on the debt to around $700 billion a year, the largest federal expenditure. This is how you know they are going negative in the coming years.
You are almost correct.
They are in a panic to get as far off the zero bound as they can before recession hits so that they WON’T have to go to negative rates.
Financing a 3/4 $TRILLION annual trade deficit at negative interest rates might not go over too well some or all of the BRICS.
Old Guy said:
Bingo Todd and Bam, you two win the prize!!!!!!!!!!!!!!!!!
The Fed is hiking so they can once again go to zero percentage when the economy tanks. Everyone else at negative and the USA even though low is still positive.
Once the economy starts tanking they will go lower stating they will save us all even though their actions are the root of the problem. The media will worship them, the sheeple will cheer and real people busting their tails and doing the right thing will once again get screwed. Gotta love it!!!!
PSYOPS works wonders does it not?
“objectives of maximum employment and 2 percent inflation”
Let that sink in. The Fed’s stated goal is to steal 2% of your money’s value each year and people are fine with it.
Would you invest in a mutual fund with a 2% expense ratio? Nope. Too expensive. But, erode the value of money 2% and everyone applauds.
Blows my mind.
Dumbass hiking Into a slowing economy.
I don’t understand why there is so much talk of a slowing economy, I live in the metro detroit area and there are help wanted signs up everywhere. Even skilled trades and their apprenticeships can’t find employable people. No one wants to work anymore and those that do are getting wage inflation. I have a 20 year old house that I was thinking of selling and moving into a smaller home now that my kids are almost gone. Last one graduates spring. A new home a few miles away that is about 35-40% smaller is size will cost me about 15% more than I can sell my home for. New construction cost have gone through the roof. I don’t know who would be dumb enough to pay the inflated price of a new home now, but I guess the payments are affordable due to basically suppressed interest rates. Like I said the CPI doesn’t measure real life expenses. Its kept artificially low so the government can continue to finance their vote buying largess to support the welfare state. There is no slowing of the economy, its forming a bubble that will burst at some point. No one can know when however.
The fed should not be setting interest rates at all they are completely clueless like the rest of the idiots that we call the “government”. Interest rates should be set by the market place i.e. free market capitalism rather than crony capitalism like it is now. I don’t know how interest rates were determined prior to the creation of the fed but I would like to see other options. They have screwed those who save vs the wall street financiers who are the feds puppet masters. As far as Mish’s comments on the CPI I would say the true inflation rate in real life far exceeds what the CPI states.
The fed should not be setting interest rates at all they are completely clueless like the rest of the idiots that we call the “government”. Interest rates should be set by the marketplace i.e. free market capitalism rather than crony capitalism like it is now.
“The fed should not be setting interest rates at all they are completely clueless like the rest of the idiots that we call the “government”. Interest rates should be set by the marketplace i.e. free market capitalism rather than crony capitalism like it is now.”
The only people that would NOT believe this statement are those that believe in politicians, that sell the idea they are Godlike and can manipulate the business cycle. Volcker finally acknowledge the business cycle and admitted that Marxist-Keynesian economics had failed, but politicians can never admit they have no power to alter the business cycle. What would they have to sell?
What are we going to do to move back to free market capitalism? The answer starts with short term-limits, so our so-called Reps would stop selling lies and their souls to get re-elected. The influence of lobbyist would decline with their ROI, as the cost to bribe a new politician every election becomes prohibitive.
BTW, I have been stating in your blog consistently that the Fed will raise rates, and keep raising, NOT because of any of the factors discussed, but because they fear the label of serial bubble blower, and Bullard recently admitted it when he said, “The one thing that has changed a lot [since Jan] is equity prices.”
Like politicians, the Fed is also impotent when it comes to manipulating the business cycle, just as Volcker learned. Unfortunately, power not only corrupts, but it raises a false expectations that it must be acted upon. Absolute power is like a standing army, which our Founder’s warned would be put to work to justify their existance.
If you understand the stock market will be the driver behind Fed action, then you need to understand what is driving stocks. It’s not fundamentals, and it certainly is not the retail investor who is not in yet, as they are still traumatized by 2007-2008. If they are not in yet, how can stocks be in a bubble? Stocks are rising and will continue to rise for one simple reason – capital flows from regions of the world that are in MUCH worse shape than the US, especially the pending implosion of the euro/EU.
Act like an Indian – put your ear to the ground and asked yourself, is govt coming or going?
Exactly. If Trump doesn’t drain the swamp by passing term limits, one longer term only, and campaign finance reform he will be a failed president. Its a very labor intense process, a constitutional convention, but he has the bully pulpit to get people(citizens and politicians) involved in getting the process through. Other wise the new boss will be the same as the old boss.