https://www.wsj.com/articles/feds-powell-could-seal-expectat…
**Fed’s Jerome Powell Seals Expectations of Half-Point Rate Rise in May**
**Federal Reserve officials have broadly signaled a desire to raise interest rates to levels that don’t provide stimulus**
**By Nick Timiraos, The Wall Street Journal, April 21, 2022**
**Federal Reserve Chairman Jerome Powell signaled the central bank was likely to raise interest rates by a half percentage point at its meeting next month and indicated similar rate rises could be warranted after that.**
**The Fed has indicated it is also set to begin shrinking its $9 trillion asset portfolio, a double-barreled effort to remove stimulus to curb price pressures....**
**The Fed raised rates from near zero by a quarter-percentage point at its meeting last month, its first rate increase in more than three years. Fed officials have almost unanimously signaled a desire to raise rates expeditiously to a more neutral setting that no longer provides stimulus. ...** [end quote]
The Fed directly controls the short-term interest rate (fed funds rate). The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence.
Keeping the fed funds rate below the inflation rate, as it has often done since 2000, pays borrowers to borrow money in real terms. This is the source of inflation for assets such as stocks, bonds and real estate.
https://fred.stlouisfed.org/series/FEDFUNDS
Raising rates from zero to a “neutral” setting – at least as high as inflation, if not more – will be shock treatment for the asset markets. The bond market is currently predicting a 5 year inflation rate of about 2.5% (and rising).
https://fred.stlouisfed.org/series/T5YIFR
Shrinking the Fed’s asset portfolio, which is about $9 Trillion of Treasury and mortgage bonds, will directly impact long-term bond and mortgage yields. (For comparison, GDP is around $22 Trillion.) Corporate bond yields are also soaring.
https://fred.stlouisfed.org/series/WALCL
https://fred.stlouisfed.org/series/MORTGAGE30US
https://fred.stlouisfed.org/series/BAMLC0A4CBBBEY
None of this is a surprise. The financial markets have been discussing this for months. But, like any addict, the markets will truly begin to scream when the crack cocaine of cheaper-than-free money is cut off.
Financial stress is low, but I’ll keep an eye on it.
https://fred.stlouisfed.org/series/STLFSI3
The Fed’s actions will have an immediate impact on asset prices. But the impact on consumer price inflation will be much slower. Consumer price inflation is mostly affected by fiscal, not monetary, stimulus which is reflected in M1, the money in cash and checking accounts that consumers can spend immediately. M1 is still skyrocketing.
https://fred.stlouisfed.org/series/M1SL
Wendy