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75 bps Fed rate hike likely amid a “world of paradox”

In a historic move, the market anticipates that the Federal Funds Rate, the key policy tool of the Federal Reserve will breach the neutral rate of interest…

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In a historic move, the market anticipates that the Federal Funds Rate, the key policy tool of the Federal Reserve will breach the neutral rate of interest with the conclusion of the Fed’s 2-day FOMC meeting later today.

In one of the most eventful years in recent monetary history, the US Fed has already raised rates by 150 basis points (bps) through 2022 and has charted a path for approximately another 200 bps during the remainder of the year.

With Y-o-Y retail inflation surging to a four-decade high of 9.1%, the Fed is widely expected to raise the benchmark overnight interest rate by 75 bps, raising the policy corridor to a target range of 2.25% to 2.50%.

A three-quarters point hike would mark one of the fastest moves in Fed history, from the zero-bound to the neutral rate.

Undoubtedly, we are living in turbulent times. It was barely four months ago, that Fed rates – the central tool of global economic policy were at rock bottom levels. The Fed was still purchasing vast volumes of bonds each month to inject life into the economy amid the covid slowdown.

The neutral rate is that level of interest rate where the economy is neither stimulated nor contracted.  According to Reuters, this is commonly believed to be around 2.4%. It is important to remember that the neutral rate is a bit of a mystery wrapped in guesswork. One can not precisely state where the interest rate inflection point lies that could balance the economy perfectly between expansion to contraction. This is a theoretical rate which can not be observed directly and is estimated using data from previous years.

Surprise, Surprise, it’s 1%?

In its previous meeting, the Federal Reserve surprised markets to the upside by raising rates by 75 bps, the highest increase since 1994.

Given galloping inflation, some market participants expect that the FOMC could continue to accelerate rate hikes, while the monetary policy rhetoric could turn even more hawkish.

As reported in the CME FedWatch Tool, there is a sizable 23.7% likelihood of a 1% hike, which has not been seen since Paul Volcker was Fed Chairman in the 1980s. The latest data also shows that there is a 76.3% probability of a 75 bps increase to the 225 – 250bps range.

Naveen Kulkarni, Chief Investment Officer, Axis Securities, stated that at this stage, markets have largely priced in a 75 bps hike and that an upside surprise may affect the markets negatively, and be seen as “extremely hawkish.”

Runaway Inflation

High consumer inflation in the United States has been at least a decade in the making. Post the 2008 crisis, the Fed reduced rates to 0%, in a bid to stimulate growth. This implies that the price of money is virtually zero, a most unnatural state.

Money pays interest for a good reason. Well, for two reasons. Firstly, when you lend money, the lender is accepting a risk that the borrower may not repay the amount. The lender rightly expects to be compensated for this possibility.

Secondly, the lender is foregoing consumption today, in return for a higher level of consumption tomorrow. Higher is the operative term and implies that the lender should be compensated for the lost opportunity cost today.

However, contrary to this logic, the Federal Reserve, the most powerful economic body in the world, along with other developed country central banks decided to keep rates subdued, i.e., preserved an unnatural state in order to kick-start growth.

Once such unconventional measures have been adopted, the biggest challenge is perhaps to know when to reverse such a stance. Traditional economic theory tells us that interest rate cuts are short-run measures. Although economists can debate what constitutes the short-run, it is unlikely to have been as long as the Fed kept rates subdued.

Coupled with QE, unhealthy levels of low-cost debt built-up in the system, and their primary impact was to inflate asset prices and distort investment rather than drive real growth.

Beginning in late 2016, when the Federal Reserve tried to correct the interest rate path in the economy, monetary authorities were forced to abandon policy normalization towards the end of 2018. The upper limit of the target range remained flat at 2.50% through half of 2019, before the Fed began a gradual descent in 25 bps decrements.

However, come early 2020, fueled by the covid panic, interest rates plunged from 1.75% in February back to the zero-bound, where they had been for nearly a decade before the attempted normalization.

It is important to note that the Federal Reserve found itself in a precarious position at just 2.50%, with debt-fueled household budgets and mounting interest payments, leading to the economy being extremely sensitive to the mildest increases.

With the onset of Covid, monetary and fiscal intentions fused to an unprecedented degree, with the widespread roll-out of targeted fiscal policies, UBI-style programs and payroll protections.

Combined with supply chain disruptions, first due to country-wide lockdowns and other public health measures, and followed by the invasion of Ukraine by Russia, inflation soared and is yet to show any meaningful signs of easing.

In fact, inflation has only accelerated while the Federal Reserve has been attempting to at least reach the neutral rate as a first milestone.

The challenge for the Fed today is that much of the cost-of-living pressures are driven by supply-side forces. Interest rate hikes are largely demand management tools, and in many ways, the current inflationary scenario may be beyond the toolkit of central banks.

The war in Europe, gas prices in the eurozone, broken and inefficient logistics, Black Sea disruptions, extraordinary delays from China due to the zero-covid policy, and a shortage of microchips are some of the key factors dragging down global supply chains.

In fact, Stiglitz and Baker argue that “by making investment more expensive, they (the Fed) may even impede an effective response to supply-side problems,” which may exacerbate supply-side conditions.

Reflecting on the complexity of the situation, Noah Smith, previously an assistant professor of finance at Stony Brook University, and a popular Bloomberg columnist, infamously tweeted way back in 2017, “Conclusion: NO ONE KNOWS HOW INFLATION WORKS. Macroeconomists need to go back to the drawing board on inflation. Square one.”

The data paradox and recessionary fears

The challenge for the FOMC committee is to avoid a repeat of the 2018 reversal and to avert a possible recession.

The data that the Fed is relying on is both dovish (encouraging growth stimulus) and hawkish (encouraging inflation management), further complicating the situation.

Signals that the economy is robust or overheating:

  • CPI has surged to a four-decade high and has disregarded expectations of a peak, thus far.
  • The Producer Price Index (PPI) is widely considered to be a leading indicator of the PPI and recorded a rise of 11.3% on annual basis for the month of June.
  • US Consumer Spending was the strongest among 14 countries, according to McKinsey’s Consumer Pulse Survey published in July 2022.
  • The labour market has remained tight, with the unemployment rate being sub-4% month after month
  • In its most recent report this week, the American Petroleum Institute (API) reported a drawdown of over 4 million barrels, nearly four times the projected volumes, adding to bullish sentiments.
  • The ongoing Ukraine-Russia war could drive higher inflation, particularly energy and food goods, pinching the average household.

Signals that the economy is cooling or heading into a recession:

  • US Consumer confidence declined for a third straight month, as per Conference Board Consumer Confidence Index to 95.7 from 98.4 in June 2022.
  • The sister Expectations Index fell from 65.8 in the last study to 65.3, suggesting negative sentiments on short-term income creation, business opportunities and labour market conditions.
  • The International Monetary Fund in its latest estimates cut global growth forecasts to 3.2% and 2.9% in 2022 and 2023, a decline of 0.4% and 0.7% since April, respectively
  • Jobless claims were reported to increase to an 8-month high of 251,000, suggesting that the inflation curve may indeed be flattening.
  • Equities have performed very poorly in the high-interest rate environment, with the S&P 500 having declined 17.7% year-to-date, at the time of writing.
  • Walmart, the largest retailer in the US and a bellwether stock is often seen as a gauge of consumer sentiment. The company’s latest release forecasted that adjusted profits per share could fall by 13% this year, indicating that consumer appetite may be waning. It is important to note that this would be fueled at least in part by rising prices.
  • Although commodity prices remain historically elevated, they have eased post the Ukraine-Russia war as global growth projections have been revised downwards, and supply chains have improved in certain regions. For instance, copper prices have eased by 23.9% in the past 3 months.
  • Mortgage demand fell 6% last week as reported by the Mortgage Bankers Association, registering the lowest level since 2000.
  • With the US yield curve inverting, the markets are preferring to purchase long-term debt rather than near-term debt, signaling a deterioration in near-term expectations. This is often a precursor to a recession.

Fed decision and rate path

The Fed is likely to raise rates by another 75 bps today. Luke Tilley, chief economist at Wilmington Trust, stated that as long as inflation shows “no sign of abating, you are going to have a united front.” However, if inflation does peak, this may lead to diverging opinions between FOMC members.

As the cost of living eases or recessionary conditions worsen, the FOMC members will have to determine the best way forward between keeping rates high to manage supply-side heavy inflation but risk a recession and a downturn in job growth.

However, markets are not convinced that the Fed can continue to tighten as intended. Financial cracks are already beginning to emerge, such as the bear market in US stocks, deep trade imbalances and poor consumer sentiment.  

Given the data, policymakers could get pulled in both directions. Greg Daco, the chief economist at EY-Parthenon, noted that the U.S. is in “a world of paradox.”

In this regard, tomorrow’s release of US GDP would be a crucial indicator to follow, having seen a contraction in Q1.

If inflation were to peak in the near term, or the yield curve remains inverted, the Fed will likely be forced to cut rates quickly. Given that debt is much higher than in 2018 due to the pandemic era stimulus, and inflation is at record highs, the decision to substantially unwind policy normalization may prove much more challenging for committee members to embark upon.

The post 75 bps Fed rate hike likely amid a “world of paradox” appeared first on Invezz.

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International

Rent Control Is A Disaster – Don’t Let It Spread Across The Nation

Rent Control Is A Disaster – Don’t Let It Spread Across The Nation

Authored by Betsy McCaughey via The Epoch Times,

America’s renters -…

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October 14, 2023

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Rent Control Is A Disaster - Don't Let It Spread Across The Nation

Authored by Betsy McCaughey via The Epoch Times,

America’s renters - more than one-third of the nation’s households - are in for trouble.

Left-wing politicians are demanding rent regulation from coast to coast. Wherever it is adopted, the result will be a disastrous reduction in the rental housing supply, leaving renters desperate for places to live.

New York is the poster child for the failures of rent regulation. The U.S. Supreme Court is currently mulling a challenge to the constitutionality of the city’s rent regime.

Whatever the justices decide, the public needs to consider less destructive, more targeted ways to help low-income people pay for housing. The court of public opinion needs to consider these facts.

Fact No. 1: Rent regulation isn’t targeted to the poor.

In New York, there’s no means test. What you need is luck or connections. The mean income of a rent-stabilized apartment dweller is $47,000, but census data show that tens of thousands of them earn more than $150,000 per year. Some occupants use what they’re saving on rent to pay for a weekend place in the Hamptons or New England.

The pols don’t object—a sure sign they’re calling for rent regulation to help themselves politically, not the poor.

In New York, 44 percent of rental apartments are regulated by the Rent Guidelines Board (RGB), established in 1969, which sets the maximum amount by which landlords are allowed to raise the rent. Those limits apply to all buildings of six or more units built before 1974.

In 2022, the RGB set the maximum rent hike at 3.25 percent on one-year leases and this year at 3 percent. Never mind that last year, fuel costs to heat the buildings soared by 19 percent and overall inflation hit 8.3 percent.

The decisions are political, not economic. Many Democratic politicians vilify building owners as “greedy landlords” and depict themselves as the champions of the downtrodden. It’s a scam.

Fact No. 2: Winners and losers.

The winners are the lucky few with rent-regulated apartments and the pols who count on an army of tenant activists to turn out at the polls. The losers are the 56 percent of renters who don’t score a regulated apartment and have to scour neighborhoods for an unregulated place that they can afford. They’re paying more.

Why? Because regulation causes some landlords to walk away, reducing the overall supply of apartments. The laws of supply and demand mean rents go up. New Yorkers in unregulated apartments are paying the highest rents in the United States for a one-bedroom apartment. They're the real victims, and they should be furious.

Yet the left-wing press pretends that rent control offers only benefits. The New Republic warns that the Supreme Court challenge threatens “laws that have benefitted the city’s tenants for generations.” Sorry, untrue—only some tenants, and not always the neediest.

It’s economic madness. The saner way to help those who need assistance paying rent is with a voucher. We offer the needy SNAP debit cards to help them pay for groceries. No one slaps price controls on grocery stores or designates certain stores as “regulated,” forcing them to sell at below cost.

Yet New York forces certain landlords to pay what should be a public cost shared by all, an argument made to the court.

Fact No. 3: The Marxist fantasy that rent regulation will help the poor is spreading across the United States and Europe as well.

Maine and Minnesota have enacted laws allowing municipalities to impose rent regulations. In November 2024, California voters will be asked to approve a proposition allowing local governments to add additional restrictions to the state’s existing rent caps.

The laws of supply and demand are international. Berlin froze rents in 2019, and the rental supply plummeted, according to the Ifo Institute, a think tank.

Yet London Mayor Sadiq Khan is calling for freezing rents for two years. London provides housing vouchers to the poor—a smarter approach—but when the city froze the voucher amounts during the COVID-19 pandemic, fewer apartments were available in the price range. The answer is to raise the voucher amount. Freezing rents will only make the shortage worse.

Ignore the demagogues. The evidence is in: Rent regulation is a political scam. There are better ways to help Americans afford a place to live.

Tyler Durden Sat, 10/14/2023 - 16:20

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Government

‘No Regrets’: Former CIA Director Repeats Debunked Russian Disinfo Claims About Hunter’s Laptop

‘No Regrets’: Former CIA Director Repeats Debunked Russian Disinfo Claims About Hunter’s Laptop

In an interview last night with Fox’s Bret…

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'No Regrets': Former CIA Director Repeats Debunked Russian Disinfo Claims About Hunter's Laptop

In an interview last night with Fox's Bret Baier, former CIA Director Leon Panetta humiliated himself as he defended the letter that he and 50 other so-called 'intelligence officials' signed suggesting that the Hunter Biden laptop was Russian disinformation.

Even more unsettling were his comments that he believes it could still be Russian disinformation.

“That letter was used in the debate, I haven’t asked you this but do you have regrets about that now looking back, knowing what you know now?” Baier asked.

Panetta explained that he was “extremely concerned about Russian interference” in the run up to the 2020 Presidential Election between then-former-Vice President Joe Biden and then-President Donald Trump.

He claimed that intelligence agencies discovered that “Russia had continued to push disinformation across the board.”

He said that he wanted to “alert the public” about the “disinformation efforts” to influence the election.

“And frankly, I haven’t seen any evidence from any intelligence agency that that was not the case,” Panetta said.

“You don’t think that it was real?” Baier asked.

“I think that disinformation is involved here. I think Russian disinformation is part of what we’re seeing everywhere,” Panetta responded.

“I don’t trust the Russians, and that’s exactly why I was concerned that the public not trust the Russians either.”

And finally, Baier asked if Panetta had any regrets over how he handled the story.

“No, I don’t have any regrets about not trusting the Russians,” Panetta said.

As Jonathan Turley pointed out,Panetta simply refused to acknowledge:

(1) American intelligence quickly debunked the claim and said that there was no evidence of Russian disinformation behind the laptop,

(2) the emails contained in the laptop were quickly authenticated by the other parties,

(3) the FBI authenticated the laptop,

(4) Hunter Biden has since sued over the use of his laptop, and

(5) the media has independently authenticated the laptop.

This was the man in charge of our CIA.

As a reminder, it has also been shown that the Biden campaign and associates coordinated the letter.

Watch the lying liar lie below...

We give the last word back to Turley who summarized the former spook's self-immolation perfectly: "Panetta has become the personification of the economic theory of path dependence. No matter how much countervailing evidence is presented to Panetta, he still refuses to accept the authenticity of the laptop."

However, in order to admit to these facts, Panetta would have had to admit that he was a willing or unwitting dupe of the campaign. It is easier to simply continue to claim that this could all be the invention of the Russians.

Yet, as Turley exclaims, Panetta is still sought for his advice on other intelligence matters as he continues to repeat disproven claims because the truth is simply too costly on a personal level to acknowledge.

What do we call false claims that are repeated despite being repeatedly debunked and disproven? Oh, yea, disinformation.

Tyler Durden Sat, 10/14/2023 - 14:35

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Government

Bibi & Khamenei Trade Social Media Threats As IDF Readies For Air, Ground, & Naval Offensive Against Gaza “Very Soon”

Bibi & Khamenei Trade Social Media Threats As IDF Readies For Air, Ground, & Naval Offensive Against Gaza "Very Soon"

Update (1330ET):…

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Bibi & Khamenei Trade Social Media Threats As IDF Readies For Air, Ground, & Naval Offensive Against Gaza "Very Soon"

Update (1330ET): The Israeli military has announced it is prepared for a coordinated air, ground and naval offensive in the Gaza Strip "very soon," according to reports from AP.

In a nationally broadcast address Saturday night, Rear Adm. Daniel Hagari issued a new appeal to residents to move to the southern Gaza Strip.

“We are going to broadly attack Gaza City very soon,” he said.

He accused Hamas of trying to use civilians as human shields.

Meanwhile, the social media rhetoric between leaders has gone to '11'...

Iran's Supreme Leader Khamenei expects a "complete victory"...

Calling on all Muslims to join the fight...

Israeli PM Netanyahu made his views very clear:

Live feeds below on Gaza: 

*  *  *

Israeli media is reporting a "greenlight" has been given for the expected major Israeli offensive on the Gaza Strip as massive convoys of Palestinian civilians have been observed fleeing to the southern part of the densely populated strip. So far there has been limited ground incursions by the army into the strip, targeting Hamas operatives and reportedly to gain intelligence on the whereabouts of hostages. 

The United Nations has issued a report saying at least 423,000 Palestinians have already been internally displaced within Gaza and this massive figure is expected to ratchet further. Likely it has surpassed a half-million as of Saturday, following the Israeli-issued evacuation order, which included dropping thousands of leaflets and warnings over Gaza City. 

Via The Guardian

The UN said it "considers it impossible for such a movement to take place without devastating humanitarian consequences." Middle East Eye and other regional sources have said over 700 Palestinian children were killed in one week of fighting. As of Friday Israel authorities tallied that over 1,300 Israelis were killed by the Hamas terror attacks on the southern settlements and the music festival, and rocket fire, with at least 3,200 wounded. 27 among the dead were Americans.

Middle East Eye on Saturday reports the following of the mounting Palestinian death toll in both Gaza and the West bank as follows:

Israel has killed at least 2,215 people in Gaza over the past week, according to the Palestinian health ministry. Of those killed, 724 are children and 458 are women. Some 8,714 people have been wounded in the besieged enclave in that time, it added. 

Meanwhile, Israeli forces have killed 54 people and wounded 1,100 others in the occupied West Bank.

According to a review of the last hours of developments, the population is about to run out of water as the remaining supply dwindles after Israel cut off external supply sources: 

  • UN agency for Palestinian refugees says its shelters in Gaza “are not safe anymore” as it warns water running our for besieged enclave’s residents.
  • More than 320 Palestinians have been killed in the past 24 hours, including many women and children killed in Israeli air raids on convoys fleeing Gaza City, according to health officials.
  • The rising toll comes as Israel continues bombing Gaza a day after telling 1.1 million residents to head south ahead of a looming ground offensive following Hamas’s attack inside Israel last week.
  • At least 2,215 Palestinians have been killed and 8,714 wounded in Israeli air attacks on Gaza. The number of people killed in Israel has reached 1,300, with more than 3,400 wounded.
  • In the occupied West Bank, the number of Palestinians killed by Israeli fire in the past week has topped 50. More than 1,000 have been wounded and hundreds arrested.

The fate of the estimated 100 to 200 hostages in Hamas captivity still remains largely unknown, but Hamas in statements which have been underreported in Western press has claimed that over two dozen of the hostages have been killed by the IDF's ongoing aerial bombardment of the Gaza Strip: 

Hamas' Izz al-Din al-Qassam Brigades said nine more captives were killed in indiscriminate Israeli shelling in the last 24 hours, including a number of foreigners. 

Qassam has previously announced the death of 17 captives in Israeli air stikes in Gaza over the past week. 

Sky News and others are also reporting, based on Israeli sources, that bodies of hostages have been recovered after some of the initial IDF infantry cross-border raids which began Friday into Saturday:

Raids carried out on the Gaza Strip by Israeli forces discovered human remains of those who had been missing since Hamas's attack last weekend, local media is reporting.

According to Haaretz, armed forces entered an enclave where it is thought up to 200 people were being held hostage by Hamas, and retrieved the bodies of several people.

Items belonging to the missing people were also discovered. 

The US said Friday it chartered its first successful evacuation flight, with talk of more to come.

TOI: A military official at the forensic center at the Military Rabbinate's headquarters in Ramle stands in front of the remains of the victims of Hamas's October 7 shock onslaught in Israel, October 13, 2023. Flash90

There are Americans (many of them likely dual nationals) among the population of Gaza, which Washington says it is trying to facilitate safe exit for as Israeli airstrikes continue. Dangerously, the lone Raffah border crossing into Egypt has at this point been bombed several times. 

But regional media is reporting there's been a diplomatic breakthrough on this front, as Israel, Egypt, and the United States have forged an agreement to let foreigners residing in Gaza pass through the Rafah border crossing into Egypt.

Scene from the frontlines as the IDF build-up outside Gaza continues:

Huge civilian convoys have been witnessed fleeing to the southern half of Gaza, creating bottlenecks...

The Times of Israel cites a senior Egyptian official as follows:

The official says Israel has agreed to refrain from striking areas the foreigners would pass through on their way out of the besieged Palestinian territory. He adds that Qatar was involved in the negotiations and the participants received approval from the Palestinian terror groups, Hamas and Islamic Jihad.

The agreement  does not deal with hostages being held by Hamas.

A second official at the Egyptian side of the Rafah crossing point says they received “instructions” to reopen it on Saturday afternoon for foreigners coming from Gaza.

But Egypt is by and large not letting Gazans exit, even erecting bigger concrete barriers of extra border protection, amid what's setting up to be a catastrophic humanitarian crisis as the Israeli pressure ratchets.

The IDF says it is about to attack the northern half of the Gaza Strip with "great force" - while the US and other countries are urging for caution regarding Palestinian civilians. Below is rare footage of an elite Israeli rescue squad in action (intentionally blurred by IDF sources):

Washington has still all the while said it "stands with Israel" - and has not tried to actually halt the unrelenting IDF bombardment of civilian areas.

Meanwhile, things continue ratcheting in south Lebanon, with reports of new strikes being exchanged between Israel and Hezbollah, and other pro-Palestinian factions.

Tyler Durden Sat, 10/14/2023 - 13:40

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