Federal Reserve intends to increase by .75

Mortgage rates average 7.1% as of last Thursday according to Freddie Mac. 7.08 percent now, a jump of 3.86 percentage points, is the steepest increase rates have gone through in a year, ever.
4 percent — considered “restrictive” territory that should slow economic growth; the new current rate set by the Federal Reserve.

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I listened to the Fed chair’s presser and he said something interesting when asked by a Fox News reporter if the fed was fighting a headwind of fiscal stimulus. He said that fed spending isn’t the problem, savings are the real cause of ongoing spending that continues to stimulate the economy despite rate cuts.

I think he’s pointing to investors as the source of ongoing consumer demand. The wealth effect of rising asset prices is still strong despite the recent stock market declines. His statements worry me in that the Fed may need to increase rates to the point where surplus savings get mopped up through further market declines. I think we see another couple of legs down before the Fed is done cutting.

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Seems Powell has squashed any thoughts of slowing down in the near term:

However, comments from Fed Chair Jerome Powell that it was “very premature” to be thinking about pausing rate hikes sent stocks sharply lower.

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When the rate increase was first announced, the press release had extremely vague and non-committal language.

Of course, the lemmings on the Street interpreted that as confirmation of what they wanted to hear, and ran the Dow up some 300 points.

Then Powell actually said something. Not what the lemmings wanted to hear. So they gave back their 300 point gain, and left the Dow down 500 instead.

“dumb, panicky, animals”

Steve

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Employment openings for the month of September totaled 10.72 million, well above the expectations of the Federal Reserve. The Federal Reserve’s aim at loosening up a historically tight labor market indicates its target rate to around 4.75 by the end of 2022.
Currently there are 2 jobs available for everyone seeking employment. Retail Trade hires have slowed month over month, though layoffs are nill; might be a sign of a “soft landing” predicted by Powell. Strong demand for workers across multiple sectors has driven wages up roughly 6% on an annual basis.
The last time the labor market saw unemployment under 4%, the Fed hiked the interest rate to 5.75% (levels last seen in 2006) when rates eventually peaked, afterwards the labor market would not see unemployment under 4% for a decade.
The question is, when will the rate hikes effect the roaring labor market, and or reverse wage inflation/increases? 5%? 6%?

Point of interest…
NYT Deal Book Column by Andrew Ross Sorkin no link

Snippet

Meanwhile, investors will also watch the Bank of England tomorrow, when it convenes its first rate-setting meeting since Rishi Sunak became Britain’s prime minister. Like the Fed, the Bank of England is expected to raise rates by 0.75 percentage points, the biggest increase in 30 years, to bring down torrid inflation and maintain a sense of calm in the markets for British government bonds and the pound.

Didn’t help that one reporter asked how Powell felt given that the market was still going up after the increase. (It had started to go down by then but perhaps he didn’t have real-time data on his phone.) Powell got feisty and started pushing back. The market went down harder in real time. Was impressive to watch.

Powell, IMO, left no doubt that he believes inflation is THE beast to kill and he will do what he has to do to kill it. That may mean hurting other things in the process, which he feels is unfortunate but possibly necessary to kill off the greater inflation evil. It’s not yet time for pausing rates, nor necessarily slowing rate increases, though they will look at all the data to determine that for December or January. He also said rates were likely to go higher than originally thought and stay there longer than originally thought.

He seems to be frustrated that no one is taking him at his word. IMO that’s dangerous for your account. I would be surprised if they don’t do another 0.75% increase in December, if only for credibility.

Don’t fight the Fed.

IP

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Fed Chair Jerome “Buzz Lightyear” Powell promises interest rates to infinity and beyond.

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That kind of hyperbolic statement doesn’t help things.

Perhaps you are attempting humor that went over my head.

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Agreed, yeah if we (Powell included) can just get someone to clean our house and scrub our kitchen floors for $2.75/Hr and Make America Great again…
Whatever it takes

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Meanwhile, the “wise” are still trying to twist what he said into what they want to hear.

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Joe Biden will regret reappointing this man, if he doesn’t already. Powell will not be satisfied until the economy is wrecked.

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Powell probably wants his place in the history books next to Volcker, as the killer of inflation. He wants the adoration of the other financial thinkers. No-one talks about what Volcker did to crush the economy. They only talk about the “supply side miracle” that is measured from the lows that Volcker drove it to.

Steve

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IIRC, savings went way up after all the stimulus money was sent out, so the two may be related.

DB2

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I’m curious if the Fed is considering the fact that wages are and have been going up at the same time as inflation. This is not normal, and it mitigates the impact of inflation. Latest ADP numbers I remember seeing wages are still climbing at a good clip.

I still feel Powell is over-reacting and doesn’t realize it. It’s like he just simply wants to be remembered like Volker, and nothing else matters.

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Decent article on yesterday’s presser, with actual quotes from Powel, not just interpretations of those quotes, though there is plenty of that as well.

IP

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Rates affect the value of the USD, which seems to have plateaued.

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That’s perfectly normal, and is a cause of inflation. Rising wages increase the price of goods and services, and is part of the vicious cycle of inflation.

Ultimately, the goal of raising interest rates is to reduce the number of job openings - which currently exceed the number of workers available to fill those jobs. That is a significant source of rising wages as employers compete to get employees. (Side note - immigration, anyone?)

If you want to see when the Fed will stop raising their rate target, watch employment. When the number of jobs available goes below the number of unemployed, the wage pressure will wane and inflation will slow. That’s when interest rates can stop rising and eventually fall.

–Peter

We are in a different part of the economic cycle. The tighter labor market is wanted. It is creating wealthier consumers and savers. Corporations profit a great deal from this. The government is collecting far more in revenues to use in major infrastructure projects.

The reason for higher rates is to bring down asset and input costs. Manufacturing needs much lower relative input costs. The USD needs to buy a lot more than in the past couple of decades again in relative terms.

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