Tag: the fed

How to Interpret the Jobs Report

Posted on by The INO.com Team

Friday’s jobs report for September showed a decrease in monthly gains, with 263,000 new jobs added last month, a decline from the prior month in which 315,000 new jobs were added.

The deep impact it had on almost every asset class in the financial markets was not because of the tepid numbers but rather hopes by the Federal Reserve that these numbers would be even lower.

Bloomberg Jobs Graph

The Federal Reserve had hoped that Friday’s report would reveal even slower growth because that would indicate progress by the Federal Reserve in reducing inflation.

Inflation is still greatly elevated at a 40-year high even after the Federal Reserve has raised interest rates at every FOMC meeting since March. The Fed raised rates by 25 basis points in March, 50 basis points in May, and 75 basis points in June, July, and September. The Fed took their benchmark Fed funds rate from between 0 and 25 basis points in February to between 300 and 325 basis points in September.

Although Friday’s report indicated slowing job growth it is believed that this contraction is not enough for the Federal Reserve to slow down its current pace of interest-rate hikes. Continue reading "How to Interpret the Jobs Report" →

Sugar-Coating the Likelihood of a Recession

Posted on by Matt Thalman

Does anyone remember when then President Donald Trump told the American population that the Covid-19 lockdowns and spread of the virus that caused the pandemic would all be over by Easter? Or when referring to Covid-19, that it was “the flu”?

During the first few weeks of the pandemic, President Donald Trump downplayed the severity of the virus to not panic the American population. In hindsight, perhaps the early days, especially when the country was in lockdown, it would have been more beneficial to not sugar-coat the virus and the timeline of when the government would lift the lockdown restrictions.

Had President Donald Trump told people the virus would kill hundreds of thousands of people, perhaps we could have stopped the virus from spreading during the lockdowns.

If President Trump hadn’t given a timeline for the lockdowns and the pandemic seeing brighter days, perhaps the government wouldn’t have lost its creditability with so many Americans during the summer of 2020 and its continued response to the pandemic.

Our current situation with the Federal Reserve and its chairman Jerome Powell, is very reminiscent of the early days of the Covid-19 pandemic.

Back in the winter and early spring, Powell told us that inflation was “transitory” and wouldn’t last. He even said current inflation wouldn’t need aggressive monetary policy changes to fall. Then, even when Powell began to raise interest rates, he told Americans that there was a high probability of a soft landing, referring to the idea that the Fed could bring down inflation slowly and gently.

Powell continued to tell us this summer that raising interest rates gradually and methodically would lower inflation but not put the economy in a recession.

Fast forward to just a week ago, and Powell tells us that the “chances of a soft landing are likely to diminish.” Inflation has hardly moved even though the Fed has raised interest rates five times, starting in March 2022. At that time, the Fed increased rates by 0.25%, 0.50% in May, then a 0.75% bump in June, July, and September.

Powell also said at the most recent Fed press conference following its announcement of the September rate hike that “we have to get inflation behind us. I wish there were a painless way to do that. There isn’t." Continue reading "Sugar-Coating the Likelihood of a Recession" →

The Fed Kicks It Up a Notch

Posted on by George Yacik

A long, long time ago — 1992 to be specific — the American media howled with derision when then President George H.W. Bush professed “amazement” at a new supermarket bar code scanner, the coverage of which was supposed to demonstrate that Bush was hopelessly out of touch with the daily lives of ordinary Americans.

To its credit, the Associated Press a few days later tried to correct that impression, but by then the rest of the press had moved on and the falsehood has lived on ever since.

Bush’s supposed gaffe at least had no policy ramifications, although the story didn’t help his reelection efforts that year.

The same can’t be said about President Biden’s absurd comments to 60 Minutes last Sunday that inflation is now under control, albeit at more than 8%, the highest sustained level in more than 30 years.

After dismissing August’s monthly CPI reading as "up just an inch, hardly at all," he proceeded to gladly dig himself even deeper, proudly telling the interviewer Scott Pelley that “we're in a position where for the last several months, it [inflation] hasn't spiked, it's been basically even.”

In other words, inflation hasn’t risen to 9% or 10% year-on-year, so we’re in good shape.

This comes on top of other whoppers he and other members of his administration have said over the past several months, such as telling us that the recent student loan giveaway and an earlier deficit-raising budget measure were all already “paid for,” as if there was no cost involved.

Not to mention labeling his most recent budgetary measure the “Inflation Reduction Act.” Talk about Newspeak.

The point here is to demonstrate just how hard Federal Reserve Chair Jerome Powell‘s job is going to be to try to bring down inflation — yes, Mr. President, it’s really high and not getting lower — without any help from the fiscal authorities led by the White House. So brace yourselves for more interest rate increases. Continue reading "The Fed Kicks It Up a Notch" →

After The Student Loan Bailout

Posted on by George Yacik

Should President Biden's recent pay-for-votes forgiveness of student loans make you nervous if you own government-guaranteed securities?

Although it seems highly unlikely, the student loan giveaway could create a slippery slope that leads next to mortgage forgiveness for veterans or some other protected or politically favored class, or some other form of federal debt relief. 

In that event, what would happen to so-called government-guaranteed securities backed by VA mortgages if the president declared that some or all of those loans were forgiven? Why not FHA loans, that are made to many of the same people who have student loans, i.e., those who supposedly have trouble paying back their loans or getting them in the first place because they have marginal credit or can’t afford a large down payment.

It wasn’t very long ago that Fannie Mae and Freddie Mac, the twin secondary mortgage agencies, failed and were taken over by the government, leaving equity investors with shares worth next to nothing (both are currently trading at about 50 cents a share on the pink sheets).

Before they went bust during the global financial crisis, it was widely assumed that Fannie and Freddie were backed by the full faith and credit of the U.S. government, which turned out not to be the case (as that great legal scholar Felix Unger reminds us).

Assuredly, mortgages backed by the VA and FHA are different animals than those issued by Fannie and Freddie, but that doesn’t mean they’re invulnerable (they historically have high default rates). With interest rates on mortgages now north of 5% and a recession possibly looming, how long will it be before pressure grows on Biden to give the weakest homeowners a break?

Now it doesn't seem so far-fetched, does it? Today student loans, tomorrow home mortgages. How far do we want to take this? 

In the past we've heard some people say we should weaponize Treasury securities against our foreign adversaries, such as the Chinese, who own so much of our debt. Does this now become a little less of a fantasy and more of a possibility, as our relationship with Beijing continues to deteriorate and the president is in such a forgiving mood?

The actual dollar cost of Biden’s student loan giveaway has yet to be calculated, but it’s safe to say it’s a lot more than he and his defenders claim. Some analysts say the total cost will be about $1 trillion, which certainly seems reasonable. It could certainly add up to a lot more, if and when those saps who are still repaying their loans wake up and realize that they have indeed been duped and demand forgiveness, too, or simply stop paying. Continue reading "After The Student Loan Bailout" →

The Fed's Intentions

Posted on by George Yacik

As we all know, there is a debate going on in the market about whether or not inflation has finally started to recede and therefore the Federal Reserve can start to let up on the brake pedal and — this seems a stretch — even start lowering interest rates and easing monetary policy in the near future.

Right now, those who believe the Fed is done tightening are winning the debate, witness the sharp rise in equity prices over the past two months. But at the same time several Fed officials have been warning that they are not done tightening yet — not by a long shot — and that more rate hikes are in the offing.

Notably, Minneapolis Fed President Neel Kashkari said last week that “there’s a disconnect between me and the markets,” adding that it was “not realistic” that the Fed would be lowering rates in the next six to nine months.

St. Louis Fed President James Bullard was equally blunt, telling the Wall Street Journal that he would “lean toward” another 75-basis point rate hike at the Fed’s next scheduled meeting beginning September 20. He said he expects high inflation “to prove more persistent than what many parts of Wall Street think.”

Yet many investors don’t believe them.

Does this mean that the Fed needs to make a much stronger message about its intentions, or is it content to let the market do what it wants to do and suffer the consequences if it has misjudged? Or are these investors correct in their assumptions?

Throughout his tenure, Fed Chair Jerome Powell has been not only market friendly but also keen on making sure the market understands what the Fed is up to. He doesn’t want any surprises. So does this mean that he is ok with what the market is doing, or if it’s wrong in reading the Fed, does he need to make a much clearer message?

Later this week the Federal Reserve Bank of Kansas City will host its annual Jackson Hole Economic Symposium in Wyoming. That seems like a good time for Powell to make it more crystal clear what the Fed’s intention are. Continue reading "The Fed's Intentions" →