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Powell Says Fed Is Ready to Raise Rates Faster If Needed
This explains the movement in the treasury market today. Powell also suggested the Fed may decide to aggressively increase interest rates as the year progresses.
The CME FedWatch tool is based on current fed fund futures quotes around the FOMC meetings and the assumption of gradual fed fund rate changes (+/- 0.25%). In the list below, more than 50% probability is used to indicate rate hike; “+” is shown after the FOMC date to indicate that rate hike can be at that or a later FOMC.
Powell's tough talk moved the rate hike expectations a LOT. Some say that the strategy may be to talk very tough, move the fed fund futures markets and then may be do less than what is in the market.
Powell wanted to see what his jawboning could accomplish. He knows the Fed SHOULD be raising rates quicker, but since that could crash markets......he can't bring himself to do it. So slow and steady we go.
Meanwhile we deal with high Negative real interest rates.
Cannot trust this Fed to actually follow through until its too late. I believe that is what happened from 1979-1981 with Volcker at the helm (the Prime rate rose to around 21.5%). Imagine locking up a CD at 20%+ per year? Shoot, I can't imagine rates over 5% ever again.
It’s a fascinating game going on. Yeah - The Fed most always likes to jawbone first. The various statements are also a way of testing the markets to try and figure out how they would react to decisions being contemplated.
It’s mystifying why equities have withstood both this Fedspeak plus the war in the Ukraine. My best guess is it’s TINA. That will work until it doesn’t. Today I’m shifting a bit of excess cash into a HY short / intermediate term muni fund that’s been knocked down 5% YTD. Might fall a bit further - but ISTM the action at the short end has been a bit excessive.
This is fascinating to watch. My "Its A Low Interest Rate World" mindset had decided that factors including demographic trends, AI, a low growth rate in Europe, and technology would likely combine to keep interest rates from rising significantly. That assumption is getting tested. Now that the Fed will be selling treasuries as part of its balance sheet reduction program, who will step in to replace them? Will foreign purchasers provide much additional help? Foreign rates seem to be generally spiking too. Will seniors help out? I suspect that seniors will be reluctant to step in until the price discovery process has had some time to play itself out. Irregardless, I suspect FOMC members are glad to FINALLY be thinking about something other than how to achieve a two percent rate of inflation.
Question, are bonds, bond funds in particular, affected only in the short term while rates are rising? If rates get to a new normal and plateau, don't they once again become a steady stream of income minus price volatility?
In at least one aspect, rising rates will be great for seniors, right? I would love to put a good chunk of money in a 4-5% CD rather than to risk the volatility of bond funds.
ISTM what you stated is essentially correct. One might nitpick and try to factor in the effect of new money flowing into that fund, as the higher returns and renewed stability would likely affect new investment. Since it’s unlikely rates would remain exactly stable, there’d still be some short term impact from interest rate fluctuation. And, unless we’re talking about treasury bonds, there’s the creditworthiness / bond rating issue. Sharp changes in rates can greatly affect the health of companies. So the underlying bonds might have a different overall credit rating after the rates had adjusted upward - limiting or enhancing the fund’s return.
But, yes. I agree generally with your statement. Agree with your sentiment. Bond funds have some undesirable characteristics. I actually did a search the other day looking for zero coupon funds which would in effect lock in a rate if held to maturity. Didn’t find anything interesting.
Back in the 70s I did very well with a number of individual bonds. I've never had the same experience with bond funds. Don't really care for them. I'm with Mike- give me a 4-5% CD rather than bond funds.
Comments
2nd & 3rd rate hike, FOMC 5/4/22+ (so, possible 50-bps hike)
4th & 5th rate hikes, FOMC 6/15/22+ (so, possible 50-bps hike)
6th rate hike, FOMC 7/27/22+
7th rate hike, FOMC 9/21/22+
8th rate hike, FOMC 11/2/22+
9th rate hike, FOMC 12/14/22+
Powell's tough talk moved the rate hike expectations a LOT. Some say that the strategy may be to talk very tough, move the fed fund futures markets and then may be do less than what is in the market.
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
Meanwhile we deal with high Negative real interest rates.
Cannot trust this Fed to actually follow through until its too late. I believe that is what happened from 1979-1981 with Volcker at the helm (the Prime rate rose to around 21.5%). Imagine locking up a CD at 20%+ per year? Shoot, I can't imagine rates over 5% ever again.
It’s mystifying why equities have withstood both this Fedspeak plus the war in the Ukraine. My best guess is it’s TINA. That will work until it doesn’t. Today I’m shifting a bit of excess cash into a HY short / intermediate term muni fund that’s been knocked down 5% YTD. Might fall a bit further - but ISTM the action at the short end has been a bit excessive.
In at least one aspect, rising rates will be great for seniors, right? I would love to put a good chunk of money in a 4-5% CD rather than to risk the volatility of bond funds.
ISTM what you stated is essentially correct. One might nitpick and try to factor in the effect of new money flowing into that fund, as the higher returns and renewed stability would likely affect new investment. Since it’s unlikely rates would remain exactly stable, there’d still be some short term impact from interest rate fluctuation. And, unless we’re talking about treasury bonds, there’s the creditworthiness / bond rating issue. Sharp changes in rates can greatly affect the health of companies. So the underlying bonds might have a different overall credit rating after the rates had adjusted upward - limiting or enhancing the fund’s return.
But, yes. I agree generally with your statement. Agree with your sentiment. Bond funds have some undesirable characteristics. I actually did a search the other day looking for zero coupon funds which would in effect lock in a rate if held to maturity. Didn’t find anything interesting.