Every other time, and there have been a few events over the past decade or more, where there was an opportunity to reset it seems like TPTB looked into the abyss, shit their pants, stepped back from the edge, and kicked the can. Is it possible to kick the can again?
Ken
Yes, there are possibilities to salvage the wreckage. There are a number of factors that are weighing down bonds and driving up the yield curve. Amongst a number of others, I can think of several circumstances that can be reversed, which will help to heal the bond market for now.
1) Putin needs to leave Ukraine and that 4.5 year mistake needs to come to an end.
2) Trump needs to leave the Middle East.
3) AI build-out needs to cool its jets.
4) Trump also needs to recant on his inflation comments.
5) The US federal government needs to get religion on deficit spending.
We need to see at least two of these items emerge immediately in order for the yield curve to move back lower. We need to see at least three to four of those over the intermediate to long-term to have any lasting effects.
Lost confidence and high inflation
I leave it to the reader to determine the likelihood of any of these circumstances unfolding. Perhaps Trump takes a 180° turn after the midterm elections. Perhaps he’s forced to leave the Middle East. A lot can happen. Unfortunately, a lot of permanent damage has been done and it’s not as easy as just withdrawing.
All of this inflationary pressure would take longer to subside. If the necessary prerequisites that I mentioned are achieved, the residual price growth problems could take at a minimum, 12 months to subside to manageable levels. It also could take as long as 24 months. A lot of confidence has been lost and that is difficult to restore in the short run.
Of course, a short run solution would be for the Federal Reserve to begin buying up US Treasuries again, but any action in that regard would be highly inflationary. More over, it would also risk causing a further erosion in the collective confidence of the Federal Reserve as an institution.
The whole premise of QE was predicated on the Federal Reserve’s ability to add debt to the bank’s balance sheet when inflation was low and when there were disinflationary catalysts plaguing the economy. Obviously, none of these factors are evident now. Thus, another round of QE would be easily exposed as a desperate attempt to keep the house of cards from collapsing.
I’m preparing for the worst
As for me, I’m not betting on any of those situations reversing anytime soon. I just finished refinancing an existing loan just before bonds took a big dump. I was able to refinance a DSCR loan at 6.05% and closed on it 2 weeks ago.
I should be closing on another 30-year fixed DSCR loan tomorrow at 6.5%. Currently, the second one is an ARM that resets in 12 months from now at SOFR plus 6%. That would make it about a 10% reset from a current 6.25%. By refinancing this second loan, this would eliminate the need for me to pay down more principal and concern myself with the potential for a much higher interest rate next year.
I’m not waiting to see the whites of their eyes to begin shooting. My financing should take me through the tribulation in fine shape, plus because of my pre-refinancing principal paydown, the two new refinance loans will save me about $1,000 a month in mortgage payments. There are many ways to prepare.
Fed’s Williams sees no urgency for next Fed rate hike
BUFFALO, Sept 29 (Reuters) – Federal Reserve Bank of New York President John Williams said on Tuesday that the U.S. central bank has time to weigh economic data before deciding when to hike interest rates again, adding one more increase is likely before the year ends.
“With the policy action we took at our September meeting, there is no need for urgency,” Williams said in a speech at the University at Buffalo in Buffalo, New York. Watching incoming data before deciding what’s next “should provide greater clarity” on how the economy is performing, Williams said.
“If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target,” Williams said, while adding, “that is just my forecast, and time — and the totality of the data — will tell.”
Williams’ pointed comments on the outlook for rates come as financial markets are pricing for the Fed to follow the September rate hike, which lifted the Fed’s overnight target rate range by a quarter percentage point to between 3.75% and 4%, with more increases as the year moves to a close.
Ahead of Williams’ comments, futures markets saw a strong chance the Fed would hike rates at its October 27-28 monetary policy meeting, a notion Williams appeared to push back on. After his remarks, traders pared those bets to about even.
Williams said in his remarks that with the economy growing robustly and the job market holding in, price pressures can now be the main focus for monetary policy.
“It is imperative that we return inflation to our 2% target on a sustained basis,” Williams said. “To do so, we must make certain that adverse inflationary disturbances do not become entrenched, and that any second-round effects on inflation remain muted.”
The Fed is raising rates to deal with inflation pressures that have overshot its 2% target for over half a decade. Those pressures have worsened this year on President Donald Trump’s trade tariffs and surging energy prices tied to the war in the Middle East.
Fed officials are increasingly worried inflation will not get back to target in a timely fashion and that action is needed to ensure that the public doesn’t shift toward accepting persistently high inflation as normal.
Williams noted in his remarks that artificial intelligence investment is also helping to drive up price pressures, while adding tariff-related pressures have largely abated so long as the president doesn’t resort to fresh import tax increases.
Williams said he sees inflation ending the year around 3.5% as price pressures ease next year on the way toward getting inflation back to target in 2028.
“Depending on what happens with the (Middle East) conflict – and there’s a lot of uncertainty about that – if you think, well, oil prices probably aren’t going to double, increase a lot again, then that impulse to inflation should fade, just like the tariff impulse to inflation has faded,” Williams said.
“Therefore, inflation should actually come down” given that energy prices are no longer likely to create outsized gains, he said.
Williams told reporters after his speech that he does not believe the increase in long-term government bond yields signals a shifting view on the part of investors toward higher inflation, while adding that at the margin, the higher yields are creating tighter financial conditions.
He also said in his remarks that he sees growth at 2.25% this year and noted that immigration factors, an aging workforce and modest productivity levels limit how high growth can get. Williams also said that he sees the unemployment rate at 4% next year.