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Why the Fed’s present rate hike campaign is almost unprecedented

  – by New Deal democratJust how unprecedented is the Fed’s current rate hike policy? Since the Fed started actively managing the Fed Funds rate…

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8 months ago

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 - by New Deal democrat


Just how unprecedented is the Fed’s current rate hike policy? Since the Fed started actively managing the Fed Funds rate in the late 1950s, only two other occasions are similar.


The reason the Fed is hiking rates is to combat inflation. But, as I have pointed out in the past, the post-pandemic Boom is very similar to the immediate post-WW2 Boom. In 1947 in the face of 20% YoY inflation, the Fed did - basically nothing. It raised the discount rate from 1% to 1.5%:



Prices stabilized on their own once they reached the limit of ordinary consumers to bear. There was a brief inventory-led recession in 1948, and the economy proceeded to motor right forward.

In 2022, the Fed raised rates by 4% in the last 10 months of the year, one of the most aggressive rate hike regimes in history, as shown in the below graph of the YoY change in the Fed funds rate:



Inflation peaked in June. Since then, the Fed has continued to hike rates by 2.75%:



Not only was the 2022 rate hike regime among the most aggressive, but it was unusual in another way. As shown in the below graph, in all other occasions of significance but two, the Fed raised rates coincident with *rising* inflation. The Fed stopped hiking rates before or at most shortly after inflation peaked:






Indeed, typically once inflation started declining, the Fed started to *lower” rates, generally in the face of a weakening economy. By contrast, last year the YoY change in the CPI peaked in June. Since then, the Fed has hiked rates by another 2.75%.

There have only been 4 other times in the past 60+ years that the Fed has continued to raise rates after inflation peaked. Two of those were barely significant, involved rate hikes of only 0.5%. In 1997, the Fed funds rate increased from 5.25% to 5% as inflation declined from 3.4% to 1.4%. In 2018-19, the Fed funds rate was increased from 2% to 2.5% as inflation declined from 2.9% to 1.5%. Neither of those were associated with a recession (the 2020 recession being caused by the pandemic).

Two other times involved rate hikes 2% to 3% or less that were associated with slowdowns but no recessions. In 1984, the Fed funds rate was hiked over 5 months from 9.5% to 11.75%, as inflation declined from 4.9% to 4.3%:



In 1994-95, the Fed funds rate was hiked from  3% to 6% over 17 months, even as inflation varied only from 2.8% to 2.3% to 3.1%:



There was a sharp slowdown - enough perhaps not coincidentally to contribute to the GOP obtaining a majority in the House of Representative for the first time since the Great Depression - but no recession.

By far the biggest episode occurred in 1980 and 1981. In April 1980 the Fed funds rate peaked at 17.5% exactly as inflation peaked at 14.6%. Thereafter, despite inflation receding to 13.2%, the Fed under Paul Volcker renewed a rate hike campaign, going from 9% to 19%, even as inflation continued to cool to 9.7%. The deep 1981-82 recession, that saw unemployment rise to over 10% for the first time since the Great Depression, ensued:



The current Fed rate hike campaign is more serious than any but the 1980-81 hikes. And even in 1994 inflation was mainly going sideways, not declining. That leaves only the 1984 episode as the only other one truly comparable.

Using core inflation, the situation is the same, with the exception that inflation has not declined significantly at present, solely due to the prominence of the badly lagging measure of owner’s equivalent rent that makes up 40% of the metric:




And it is similar if I use the core personal consumption expenditure deflator as well, with the exception of 1969, where the Fed continued to raise rates into a recession as the core deflator peaked but stabilized there. In our present situation the core deflator has declined -0.5% from 5.2% last February to 4.7% in November:






To summarize: over the past 60+ years, the Fed has normally only raised rates as inflation was rising, and stopped or reversed course once inflation began to decline. Several of the exceptions are not significant, involving rate hikes of 0.5% as inflation declined. One (1994) involved rate hikes in the face of relatively flat inflation, and of the remaining two, one (1984) contributed to a sharp slowdown in the economy with no recession. The other (1980-81) contributed to one of the two worst recessions since the Great Depression, and was justified by Volcker as being necessary to uproot inflationary expectations and a wage-price spiral.

There is very little evidence of any wage-price spiral or embedded future expectations at present. And yet the Fed has continued to hike rates even as inflationary pressures have ebbed (and outside of Owner’s Equivalent Rent, appear contained).


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Treasury Market Plays Catch-Up With Higher-For-Longer Risk

The collective wisdom of the bond market for much of this year has been betting that interest rates would soon peak and fall. But those bets appear to…

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September 22, 2023

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The collective wisdom of the bond market for much of this year has been betting that interest rates would soon peak and fall. But those bets appear to be unwinding in the wake of Wednesday’s Federal Reserve meeting and press conference.

Exhibit A is the rise in the 2- and 10-year Treasury yields, which are widely followed as key maturities for economic and financial markets analytics. On those fronts the crowd is reassessing its recent view that rate cuts are on the near-term horizon.

Let’s start with the 2-year Treasury yield, which is considered a proxy for market expectations on Fed policy. For much of this year the 2-year yield has traded below the effective Fed funds rate, which implies that the market expects the central bank’s rate hike will peak and perhaps reverse. But that view appears to be fading as the 2-year yield moves closer to the current 5.25%-to-5.50% Fed funds rate range.

The 10-year yield is pushing higher again too. In yesterday’s trading (Sep. 21), the benchmark rate rose to 4.49%, the highest since 2007.

Inflation-indexed Treasury yields continue to push higher too, testing the 2%-plus real range.

One of the catalysts that’s reportedly behind the latest run of higher Treasury yields is Fed Chair Powell’s hawkish comments on Wednesday on the matter of real (inflation-adjusted) interest rates.

“It’s a real rate that will matter and that needs to be sufficiently restrictive,” he advised, although exactly what level defines “restrictive” was left unsaid. “I would say you know it’s sufficiently restrictive only when you see it,” he added. “It’s not something you can arrive at with confidence in a model or in various estimates.”

By some accounts, the Fed appears to be on a path to leave rates higher for longer. Fed rate hikes may be over, or perhaps there’s one more in the pipeline, but rate cuts are expected to come later than recently expected.

As The Wall Street Journal reports:

“The fact that we’ve come this far lets us really proceed carefully,” said Powell. He used those words—“proceed carefully”—six times during Wednesday’s news conference, a sign of heightened caution about lifting rates.

“He didn’t sound to me like he was itching to hike again,” said Michael Feroli, chief U.S. economist at JPMorgan Chase, who thinks the Fed’s July rate rise will be its last for the current cycle. “For Powell, he sounds like he’s pretty comfortable where they are, sitting back, and watching things play out,” Feroli said.

The new dot plots for the Fed – the FOMC participants expectations for the Fed funds rate – supports the case for a higher for longer outlook. The FT notes:

The median estimate of the Fed’s 19 policymakers is for the bank’s benchmark rate to fall to just 5 per cent to 5.25 per cent next year. That was significantly higher than the 4.5 per cent to 4.75 per cent they signaled when the dot plot was last updated in June. By 2026, it was still forecast to be between 2.75 per cent and 3 per cent.

“What they’re saying there is if you have stronger growth for this year and next, it increases the risk that core inflation does not descend as much as they hope and expect,” said Daleep Singh, an ex-New York Fed official who is now chief global economist at PGIM Fixed Income.

“Therefore there is a potential need to keep nominal interest rates somewhat higher than they previously forecast,” he added.

The good news for investors is that the highest yields in ~15 years, either real or nominal, can be locked in with a buy-and-hold strategy. No one knows if current rates are at or near a peak, but this much is clear: the case for a relatively higher allocation to Treasuries vs. recent history hasn’t looked this compelling since George W. Bush was walking the floor in the Oval Office.

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By James Picerno

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Bitcoin mining can help reduce up to 8% of global emissions: Report

The report highlighted that Bitcoin mining can convert wasted methane emissions into less harmful emissions.
A paper published by the…

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September 22, 2023

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The report highlighted that Bitcoin mining can convert wasted methane emissions into less harmful emissions.

A paper published by the Institute of Risk Management (IRM) concluded that Bitcoin (BTC) has the potential to be a catalyst for a global energy transition. 

IRM Energy and Renewables Group members Dylan Campbell and Alexander Larsen published a report titled “Bitcoin and the Energy Transition: From Risk to Opportunity.” The paper argued that while BTC was perceived as a risk because of its energy consumption, it can also catalyze energy transition and lead to new solutions for energy challenges worldwide.

Within the report, the authors also highlighted the important function of energy and the increasing need for reliable, clean and more affordable energy sources. Despite the criticisms of Bitcoin’s energy intensity, the study provided a more balanced view of Bitcoin by showing the potential benefits BTC can bring to the energy industry.

Amount of vented methane that can be used in Bitcoin mining. Source: IRM

According to the report, Bitcoin mining can reduce global emissions by up to 8% by 2030. This can be done by converting the world’s wasted methane emissions into less harmful emissions. The report cited a theoretical case saying that using captured methane to power Bitcoin mining operations can reduce the amount of methane vented into the atmosphere. 

Related: Bitcoin energy pivot achieves what ‘few industries can claim’ — Bloomberg analyst

The paper also presented other opportunities for Bitcoin to contribute to the energy sector. According to the report, Bitcoin can contribute to energy efficiency through electricity grid management by using Bitcoin miners and transferring heat from miners to greenhouses.

“We have shown that while Bitcoin is a consumer of electricity, this does not translate to it being a high emitter of carbon dioxide and other atmospheric pollutants. Bitcoin can be the catalyst to a cleaner, more energy-abundant future for all,” the authors wrote.

Magazine: How to protect your crypto in a volatile market: Bitcoin OGs and experts weigh in

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Green Bubble Burst: US ESG Fund Closures In 2023 Surpass Total Of Previous Three Years

Green Bubble Burst: US ESG Fund Closures In 2023 Surpass Total Of Previous Three Years

For years, green and socially responsible investments,…

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September 22, 2023

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Green Bubble Burst: US ESG Fund Closures In 2023 Surpass Total Of Previous Three Years

For years, green and socially responsible investments, aka ESG (Environmental, Social, and Governance), have dominated the investing world. However, according to Bloomberg, a seismic shift is underway as BlackRock and other money managers unwound an increasing number of 'green' products amid soaring backlash and investor scrutiny. 

Data from Morningstar shows State Street, Columbia Threadneedle Investments, Janus Henderson Group, and Hartford Funds Management Group have unwound more than two dozen ESG funds this year. The latest unwind comes from BlackRock, who told regulators last Friday it plans to close two ESG emerging-market bond funds with total assets of $55 million. 

Source: Bloomberg

So far this year, the number of ESG funds closing is more than the last three years combined. This trend comes as investors pull money out of these funds as the ESG bubble has likely popped. 

We asked this question in early summer: Is The ESG Investing Boom Already Over?

In January, BlackRock's Larry Fink told Bloomberg TV at the World Economic Forum in Davos that ESG investing has been tarnished:

 "Let's be clear, the narrative is ugly, the narrative is creating this huge polarization. "

Fink continued:

"We are trying to address the misconceptions. It's hard because it's not business any more, they're doing it in a personal way. And for the first time in my professional career, attacks are now personal. They're trying to demonize the issues."

By June, Fink's BlackRock dropped the term "ESG" following billions of dollars pulled out of its funds by Republican governors, most notably, $2 billion by Florida Gov. Ron DeSantis.

The crux of the issue that Republican lawmakers have with radical ESG funds is that they were trying to impose 'green' initiatives on the corporate level to force change in society, and many of these initiatives would be widely unpopular at the ballot box during elections. 

Remember these comments from Fink?

Alyssa Stankiewicz, associate director for sustainability research at Morningstar, told Bloomberg, "We have definitely seen demand drop off in 2022 and 2023." 

Also, let's not forget about the 'greenwashing' across ESG industry. 

Matt Lawton, T. Rowe Price Group Inc.'s sector portfolio manager in the Fixed Income Division, recently concluded: "It's becoming increasingly difficult to find credible sustainability-linked bonds." 

The tide is reversing for Fink: "Backfire: World's Fourth Largest Iron Ore Producer Stops Purchasing Carbon Offsets."

Don't forget this: "McDonald's Scrubs Mentions Of "ESG" From Its Website."

Oops, Mr. Fink. 

Tyler Durden Fri, 09/22/2023 - 06:55

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