The Fed raised the Fed Funds Rate yesterday by 0.75% and long-term rates actually increased (a lot) after the announcement.
This is very unusual for several reasons:
- The markets had long anticipated the 0.75% hike and had “priced it in” already.
- The Fed only controls short-term rates and not long-term (30-year fixed) rates, so long-term rates do not always move in unison with short-term rates like the Fed Funds Rate.
- The markets often perceive sharp increases in the Fed Funds Rate as “inflation fighting efforts” and/or threats to economic growth – and that often causes rates to fall.
Rates increased so much after the announcement because of the comments the Fed made.
They said they intend to continue on a very aggressive path to increase rates in order to fend off inflation – saying that they will increase rates by an additional 1.25% this year alone (or 1% more than previously expected).
The bond markets took this as an admission by the Fed that they don’t have a handle on inflation – so rates shot up as a result (because nothing scares bond buyers more than inflation).
I follow a huge number of macro pundits including Jeff Snider, Grant Williams, Brent Johnson, Erik Townsend, Lyn Alden, Luke Gromen, George Gammon, Jim Rickards, Paul Krugman, Stephanie Pomboy, Jim Bianco, Lacy Hunt, Danielle DeMartino Booth, Kyle Bass, and Peter Boockvar to name a few.
As a side note, Joe Brown of Heresy Financial on YouTube is the macro pundit I recommend most highly for readers to follow because his videos are always short, up to date, and very informative (with no political spin). I also like the t-shirts he wears, and I actually emailed him to find out where he buys them (he responded; they are Next Level Fitted t-shirts from Amazon).
Anyway, almost all of the pundits I follow think the Fed is way overshooting the mark (being way too aggressive on the rate front) for several reasons:
- The data they look at is always in arrears, and they are oblivious to how soft the economy is already.
- The Fed poohbahs all lack real-world experience and are wrong shockingly often (if not always). Most of the macro pundits have too much at stake (actual money or reputations) to be wrong as often as the Fed is.
- Because they are losing credibility, they are going to stick with these rate increases until inflation (and everything and everyone else) is dead – no matter the consequences, such as a huge recession and massive unemployment.
Hence, a lot of pundits expect a massive recession to set in or to simply continue (depending on the pundit’s perspective) and even potential deflation – and I will address this in tomorrow’s blog because the implications are enormous (and possibly good from a real estate perspective).
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