Where next for interest rates as Switzerland and Norway place their votes?

The interest-rate story in 2024 appeared to be clear cut as we entered the year fired up by hints from the Federal Reserve Chair Jerome Powell. At that point bond markets surged and would have expected one and maybe two cuts by now. Whereas we were told this over the weekend on Face the Nation.

Bank of America’s prediction that the Fed will cut interest rates this year, but not until December, is a “reasonable prediction,@MinneapolisFed Pres. @neelkashkari says: “If you just said there’s going to be one cut…that would likely be toward the end of the year.”

Personally I would stay away from backing the predictions of financial market players if I was in that role. But the central point is that we are now being directed to the end of the year. As that will be in the US election campaign that begs a few questions. After all the ECB did just cut interest-rates in the midst of European Union elections. I do not expect that the Bank of England will today by Mr. Kashkari has opened up a can of worms that leaves his prediction under the Definitely Maybe category. Or to put it another way the US ten-year yield is around half a point higher than it was as the year opened.

Norway

This morning the Norges Bank has stuck to a rather similar line.

Norges Bank’s Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 4.5 percent at its meeting on 19 June.

They blow their own trumpet.

The policy rate has been raised significantly in recent years and has contributed to cooling down the Norwegian economy. Growth in the economy has slowed, and price inflation has declined.

But then seem not quite so sure.

 The Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long.

There is an issue of the confidence of central bankers being shattered or perhaps I should say their arrogance after the Transitory debacle. But now they are in a spin. Things have got better.

Since the March Report, inflation has been a little lower than projected, while unemployment has increased as expected.

I know that the unemployment rise will be brutal but in terms of policy it seems to be working. However they are now fretting about what might happen?

This could mean that inflation will be higher ahead than projected in the March Report.

This means that they are potentially on course to copy all the mistakes of the 1970s where rising inflation was ignored leading to a panicked slamming of the interest-rate brake and then holding it for too long. Or to put it another way they are focusing on what are lagging indicators.

 On the other hand, Regional Network enterprises report improved prospects, and it appears that wage growth will be higher than envisaged earlier.

So they end up rather copying Neel Kashkari.

“If the economy evolves as currently envisaged, the policy rate will continue to lie at 4.5 percent to the end of the year, before gradually being reduced,” says Governor Ida Wolden Bache.

I have to confess I am left wondering if a 2023 theme is still in play here as whilst there is only a brief mention.

or the krone depreciates,

The weakness in the Norwegian Krone when it fell from 8.2 to 11 versus the US Dollar may have left them rather scarred. Whilst it is calmer at 10.5 now that is probably buttressed by the interest-rate expectations. Especially as the issue is still in play.

The Indian rupee declines to an all-time low as broad dollar strength weighs on most emerging Asian currencies. ( @business)

Switzerland

The Swiss have taken a different course. Maybe the football last night was all too much.

The Swiss National Bank is lowering the SNB policy rate by 0.25 percentage points to 1.25%.

The explanation starts logically.

The underlying inflationary pressure has decreased again compared to the previous quarter.

But then hits rather more troubled water.

Inflation has risen slightly since the last monetary policy assessment, and stood at 1.4% in May.

Rents seem to be a problem everywhere and I will have to check if the Swiss follow the international statistical consensus on rents because if so the number will be more relevant to what happened last year?

Higher inflation in rents, tourism services and oil products has contributed in particular to this increase. Overall, inflation in Switzerland is currently being driven above all by higher prices for domestic services.

The latter sentence is intriguing because such developments were used by other central banks to justify interest-rate rises. As they are animals who love to be in a pack they will be worried by this. It takes away the excuse that everyone else was doing the same. Indeed they depart further from the pack below.

Over the longer term, it is slightly below the previous forecast. This reflects somewhat lower second-round effects.

As so often we are getting rather mixed messages here. Actually I approve of a central bank looking ahead and then it is logically consistent to cut after a lower inflation forecast. After all their inflation experience has been on a lower path than elsewhere.

The forecast puts average annual inflation at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026.

Although I do nor share their enthusiasm for the impact of one single rate cut!

Without today’s rate cut, the forecast would have been lower.

Still they have been kind enough to back my theme that central banks steer the economy via the housing market. Especially ones which have recently seen a large banking collapse.

Momentum on the mortgage and real estate markets in recent quarters has been weaker than in previous years. However, the vulnerabilities in these markets remain.

But there is an elephant in this particular room which they have ignored apart from one brief mention.

The SNB is also willing to be active in the foreign exchange market as necessary.

The Financial Times puts it like this.

SNB chair Thomas Jordan said after the move that the bank was “willing to be active in the foreign exchange market as necessary”. The franc has appreciated in recent weeks as investors sought a haven amid uncertainty caused by France calling a snap election, which sparked a sell-off in European bonds.

As well as an elephant in the room we have an echo from the past as we recall the promises of “unlimited intervention” which particularly related to the exchange rate versus the Euro. In which case we have a curious link via President Macon of France calling an election and a Swiss interest-rate cut.

Also some are fearing we may be heading back to negative interest-rates.

We think more cuts are coming,” said Melanie Debono at Pantheon Macroeconomics. “We think the SNB will broadly match the total value of ECB cuts over the easing cycle, in a bid to keep the franc relatively stable against the euro and prevent significant disinflation.”

Notice how disinflation is presented as a type of bogeyman.

Comment

Whilst we get a lot of rhetoric from central banks about inflation. But I have to confess that for me today’s moves have it as a second-order function behind the exchange-rate. Plus the Swiss are able to give the mortgage market a boost. Whilst I am considering the Swiss let me also point out that on a marked to market basis their overseas equity portfolio is looking rather good.

S&P 500 futures climbed on Thursday morning as investors look for the benchmark to add to its latest record high…..Stocks are headed for a winning week after the S&P 500 reached a fresh record on Tuesday, alongside the Nasdaq Composite. The stock market was closed Wednesday for the Juneteenth holiday. ( CNBC )

Is the Federal Reserve getting more hawkish just as the US economy weakens?

The economic theme of 2024 so far has been the expectation of and then the failure to appear of interest-rate cuts in the United States. This has a particular feature in that one member of the US Federal Reserve Neel Kashkari has apparently been on quite a journey and let us start with where he thinks we are now.

So consumption has held up remarkably well over this tightening cycle. GDP has held up remarkably well. The labour market, the unemployment rate has ticked up to 3.9 per cent. That’s still a very low unemployment rate by US history standards. The housing market has remained remarkably resilient. So if I look at real economic activity, real economic activity in the US looks quite robust and more robust than very tight monetary policy would have suggested.

So the US economy is strong and the impact of higher interest-rates appears rather muted. Which leads to this question from the Financial Times.

So that sort of suggests that monetary policy at a rate of five and a quarter to five and a half per cent isn’t very tight in your view.

To which he replies.

It’s a question that I have. It appears like it may not be having as much downward pressure on demand than I would have otherwise thought.

At the moment he is not going quite as far as suggesting another increase in interest-rates.

I think right now my best guess is we would leave it here for an extended period of time until we get a lot more data to convince us one way or the other.

Neel’s Theoretical Crisis

This is two-fold and we can start with his modelling failures when inflation soared.

And we had long-run inflation expectations that appeared to be well anchored.

He preferred theoretical models over reality and whilst he claims to be learning if we bring things up to date he says this.

Is underlying inflation really on its way down?

So another theoretical imposition as he appears unable to realise they have utterly failed. Indeed he now seems to be obsessing on something that is even more unreliable.

And the question that I’m raising publicly and to my colleagues is perhaps some of the dynamics of the reopening economy have elevated what we call R-star, at least in the short run, the neutral interest rate. Maybe that is elevated for some reason in the short run.

At this point we see that whilst it is good he realises he has made mistakes his answer is even more of the thing that has gone wrong! The use of R-star is perhaps the most extreme theoretical imposition of all as no-one knows where it is. Indeed this whole section of the interview is an admittal of that very fact. For newer readers it was believed by the US Federal Reserve an other central bankers to be around 2.5% to 3% before they made any effort to get there.  But now Neel is suggesting it is above the present US interest-rate of 5.25% to 5.5%.

So he continues to prefer theory over reality no matter how silly the theory looks. Indeed he is such an obsessive that he actually seems to believe that central banks still have credibility.

And I think that that anchoring of inflation expectations has been a foundation of a lot of the economic prosperity that America has enjoyed in the ensuing 40 years. I would be very cautious about putting that at risk.

It is like an episode of The Twilight Zone or The Outer Limits. This leads to a logical conclusion which is not a compliment for Mr. Kashkari.

You, I suppose, were dove, sort of super dove, very concerned that we were underestimating the potential of the US economy to grow. Policy, you know, was a bit too tight. That was the problem then. And now, you seem to have moved towards this actually relatively hawkish position, where now you’re more concerned about inflation being more of a problem.

Whatever extreme we are at Mr.Kashlari wants more of it.

More, more, more
How do you like it? How do you like it?
More, more, more
How do you like it? How do you like it? ( Andrea True Connection)

Is the US economy finally slowing?

There have been some suggestions of this. Whilst it was only minor US economy growth in the first quarter was revised down last week.

Real gross domestic product (GDP) increased at an annual rate of 1.3 percent in the first quarter of 2024 , according to the “second” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2023, real GDP increased 3.4 percent.

So we now have a slightly higher reduction from the end of last year. Plus this quarter is being downgraded by the Atlanta Federal Reserve.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 2.7 percent on May 31, down from 3.5 percent on May 24.

The reading was above 4% only a month or so ago. In terms of the detail we see this.

 a decrease in the nowcast of second-quarter real personal consumption expenditures growth from 3.4 percent to 2.6 percent was partly offset by an increase in the nowcast of second-quarter real gross private domestic investment growth from 5.1 percent to 6.3 percent, while the nowcast of the contribution of the change in real net exports to second-quarter real GDP growth decreased from -0.06 percentage points to -0.60 percentage points.

If we start with the income and consumption figures the Bureau of Labor Statistics had released this.

Real DPI decreased 0.1 percent in April and real PCE decreased 0.1 percent; goods decreased 0.4 percent and services increased 0.1 percent

So actual monthly falls in real terms This reinforced the theme suggested in the middle of May when the Census Bureau released the retail sales numbers.

Advance estimates of U.S. retail and food services sales for April 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $705.2 billion, virtually unchanged (±0.4 percent)* from the previous month

 

So again a real terms decline. Returning to the GDP Now release there was also a significant fall in US net exports. All of this was offset a little by the rise in investment.

Comment

There would be a particular irony if the US economy slowed just as Minneapolis Fed President Neel Kashkari is worried about an acceleration of the economy. The issues are always complex as for example it would mean that the lags in the impact of interest-rate rises have got longer. There is logic in that via the number of long-term fixes in the mortgage market but of course central bankers prefer theory to logic.

There is no real addressing of his own role in the surge in inflation.

You also had a lot of stimulus — fiscal stimulus and monetary stimulus — flooding those same goods markets.

One solitary sentence but with no real addressing of the fact he wanted more monetary stimulus which would have led to even higher inflation. Plus he lets the expansionary fiscal policy ( which he helped finance) slide by too. Moving on he has quite some chutzpah claiming this.

but fortunately the Federal Reserve acted aggressively and has reinforced the point that we are dead serious about getting inflation back down.

And indeed this.

because I don’t want to risk damaging the long-run credibility of the Federal Reserve,

Podcast

 

What are the consequences of US bond yields rising above 4.5%?

This morning the heat is on and it comes from a source that you might nor expect as investor’s minds turn towards when the central banks will start easing policy. Actually in a way it is a reversal of the response to the credit crunch. Back then we saw interest-rate cuts which were followed by QE bond buying to lower yields. Now we have seen interest-rate rises and maybe the balance sheet reductions ( for example the Bank of England sold another £650 million yesterday) have led us to this.

10-Year Treasury Yield moved up to 4.55% today, highest since Oct 2007. ( @charliebilello )

Others put it in more clickbait fashion.

BREAKING: Bond tracking ETF, $TLT, falls below $90 for the first time since April 2011. The 10-year note yield is now trading above 4.50% for the first time since 2007. The 2-year note yield is now up a massive 500 basis points since September 2021. Treasury yields are hitting 15+ year highs daily now as Fed pause expectations go well the second half of 2024. ( The Kobeissi Letter )

There is quite a bit going on as this applies pressure in a lot of areas. We can start with the US itself where borrowing for the US government is getting more expensive and it is not the only one.

For the average lender, a top tier 30yr fixed rate is now over 7.5% for the first time in at least 22 years.  The average borrower (not “top tier”) is seeing rates that are even higher.  ( Mortgage Daily News)

With yesterday’s push higher in bond yields maybe more is to come. Although care is needed as we have two different situations here. New buyers and those refinancing are being hit but due to the existence of 15 and 30 year mortgages the effective rate for the overall market is between 3.5% and 4% due to some many (wisely) being taken out at cheaper yields.

King Dollar

It could not be much clearer here.

LONDON/SINGAPORE, Sept 26 (Reuters) – The dollar rose to a new 10-month peak on Tuesday as U.S. bond yields surged to their highest level since October 2007, while the Japanese yen resumed its slide, putting traders on alert for signs of government intervention.

The Japanese Yen has gone through 149 and the Euro has gone to a 6 month low.

The euro was last roughly flat against the dollar at $1.0588, after hitting its lowest since March at $1.057.

So the international consequence is another phase of US Dollar strength which makes everyone else’s inflation problem worse. Another issue is that the interest-rate rise from the ECB a week or so ago has not helped here.

What is causing this?

One potential factor is the Higher for Longer theme of the US Federal Reserve.

Sept 25 (Reuters) – Minneapolis Federal Reserve Bank President Neel Kashkari said on Monday that given the surprising resilience of the U.S. economy, the Fed probably needs to raise borrowing rates further and keep them high for some time to bring inflation back down to 2%.

Although if you listened to the words of central bankers you would be long US bonds at the top and now selling at the bottom!

Next up is the borrowing of the US government but that has not really changed although there are again shutdown fears.

“A shutdown would be credit negative” for the U.S. debt, while “A shutdown “would underscore the weakness of U.S. institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years,”  Moody’s analysts wrote.

The credit rating firm added, “In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability.” ( CBS News)

This is one of those spiraling issues as higher yields cause wider deficits and weaker debt affordability.

Hedge Funds

There seems to be another factor in this scenario as the Financial Times explains.

Over the past month, the Bank for International Settlements, a convening body for the world’s central banks, and the US Federal Reserve have both pointed to a rapid build-up in hedge fund bets in the Treasury market.

The so-called basis trade involves playing two very similar debt prices against each other — selling futures and buying bonds — and extracting gains from the small gap between the two using borrowed money.

On a tactical level there is no risk here because your futures position should be the mirror image of your cash bond position. It is also nothing new as I recall watching traders do such trades in BTPs on the LIFFE floor in the 1990s. That was very old era technology as they were on landlines connected mostly to Milan to trade cash Italian bonds against the futures in London. It is always Italy isn’t it? Actually it is the higher interest-rates which bring this into play again in the US  which was true of Italy back then with the addition that the frenetic nature of the Italian bond market added to the risk but also potential profits.

The problem is not this per se as someone getting the wrong way on a particular deal may not be significant. But if we switch from tactical to strategic we see that the size of the trades might be an issue.

By taking advantage of the ability to borrow on both sides of the trade, hedge funds can deploy huge leverage. The head of one fund that has engaged in this trade says traders have in the past been able to lever up to 500 times.

Ah leverage of 500 times! What could go wrong?

For them now we have another bit of central banking influence they think very little as thy have a backstop.

In such a situation, it would be highly unlikely for the US central bank to simply stand back and watch. The executive at the large US bank says: “The assumption is that the Fed will step in to save the repo market, which they have in the past, so my view is that they will step in again if anything happens.” ( FT)

Actually what you are creating is the possibility of an enormous whipsaw as this happens first.

Regulators say this all adds up to a situation where just a few large firms getting out of their bets could potentially encourage or force others to do the same, quickly leading to a doom loop of distressed selling in the world’s most important asset market. ( FT)

Comment

In a way a lot of this comes from the consequences of the largest financial punt in history. That was when the central banks surged like headless chickens into the world’s bond markets and not only pushed them to all-time highs but bought at the top. That helped create the inflation that forced them to raise interest-rates and reduce their balance sheets and so  effectively sell bonds at the bottom.

In that scenario we see how bond yields have risen. But there is another factor at play which further raises the risk of the basis game. QE has reduced bond market liquidity as so many players were punished. Think of what the ZIRP equivalent for bond yields did to pension funds and insurance companies?! All the 2020 and 2021 purchases now look awful. In a sense we are back to this again.

Does anyone know the way?
Did we hear someone say
“We just haven’t got a clue what to do!”
Does anyone know the way?
There’s got to be a way
To Block Buster! ( Sweet)

Now as we are seeing a bit of a panic let me give you the other side. Buyers of US Treasuries are getting 4.5% which is 4% or so better than 2020. Next up is those wondering that the central banks have little alternative but to buy it all again, however much they might deny it.

The establishment seem very keen to tell us that US interest-rates are going higher

One of the major economic stories of last year was the rise in US interest-rates. The US Federal Reserve is keen to tell us it was rapid but the main issue was sung about by Carole King.

And it’s too late, baby, now it’s too late
Though we really did try to make it
Somethin’ inside has died

Monetary policy is supposed to get ahead of events due to the lags in the system a subject I will return to. But instead we got a central bank chasing inflation’s rise rather than getting ahead of it. A consequence of the move was that we saw a strong US Dollar last year, which via its role as the reserve currency in which commodities are priced. made inflation worse for everyone else.

Let us remind ourselves of where things stand.

In support of these goals, members agreed to raise the target range for the federal funds rate to 4¼ to 4½ percent.

Last night’s Fed ( FOMC) Minutes contained some rather aggressive rhetoric.

In discussing the policy outlook, participants continued
to anticipate that ongoing increases in the target range
for the federal funds rate would be appropriate to
achieve the Committee’s objectives.

Not so much that bit but more this.

A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path,

Then here.

Participants generally indicated that upside risks to the
inflation outlook remained a key factor shaping the outlook for policy

As to rate cuts well we got an official denial.

No participants anticipated that it would be appropriate to
begin reducing the federal funds rate target in 2023.

Apart from the track record of official denials there is also the track record of the Federal Reserve in forecasting the future!

As ever the rhetoric is contradictory as one the one hand.

In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against
prematurely loosening monetary policy.

But on the other rather than being rigid it needs to be flexible.

Participants generally noted that the Committee’s future decisions regarding policy would continue to
be informed by the incoming data

The message overall is that they intend to keep raising interest-rates.

Neel Kashkari

The President of the Minneapolis Fed wrote a piece on Medium yesterday. There were several things we could take from it. Firstly he got things very wrong.

To state clearly, I was solidly on “Team Transitory,” so I am not throwing stones.

Then confesses implicitly that the Group think I accused central bankers of was true.

But many of us — those inside the Federal Reserve and the vast majority of outside forecasters — together made the same errors in, first, being surprised when inflation surged as much as it did and, second, assuming that inflation would fall quickly. Why did we miss it?

Oh and he also confesses to another criticism of mine which is preferring economic models over real world experience.

The inflation in this example is not driven by the two primary sources that traditional Phillips-curve models used by policymakers, researchers, and investors consider: (1) labor market effects via unemployment gaps, and (2) changes to long-run inflation expectations.

Actually the Phillips-curve stuff is especially poor as it was quite clear that the credit crunch changes things fundamentally for it.

If we return to the timing point I make so often Neel seems to have no idea about it at all.

While I believe it is too soon to definitively declare that inflation has peaked, we are seeing increasing evidence that it may have. In my view, however, it will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked.

This is a really big deal because in monetary policy if you wait to be “sure”, the one thing you are likely to be is wrong. This is because you have lags in the data arriving as well as lags before policy actions begin to work. But as you can see Neel is trying to present himself as a doughty inflation fighter.

Once we reach that point, then the second step of our inflation fighting process, as I see it, will be pausing to let the tightening we have already done work its way through the economy. I have us pausing at 5.4 percent, but wherever that end point is, we won’t immediately know if it is high enough to bring inflation back down to 2 percent in a reasonable period of time.

One might have reasonably thought that after confessing to the problems with economic models he should have the sense to steer clear of a precise number like that. Especially as the US does not move in sizes that get you to 5.4%. Also we got another official denial about interest-rate cuts.

Given the experience of the 1970s, the mistake the FOMC must avoid is to cut rates prematurely and then have inflation flare back up again.

International Monetary Fund

This too has weighed in on the subject via an interview with the Financial Times.

Inflation in the US has not “turned the corner yet” and it is too early for the Federal Reserve to declare victory in its fight against soaring prices, a top IMF official has warned.

You might think that with the track record of the IMF in recent years it would avoid giving advice to others. But, instead it has a policy prescription as well.

In an interview with the Financial Times Gita Gopinath, the fund’s second-in-command, urged the US central bank to press ahead with rate rises this year despite a recent moderation in headline inflation following one of the most aggressive tightening campaigns in the Fed’s history.

As you can see the Financial Times is high on the hype here with “top official” and “second-in-command”. They seem unable to stop it.

The comments from the fund’s deputy managing director

But whilst not quite as aggressive as Neel Kashkari we get to the point.

Gopinath backed the Fed’s benchmark rate rising to about 5 per cent and staying there throughout this year, in an effective endorsement of the latest “dot plot” projections from US central bank officials.

Comment

It is hard not to have a wry smile at a reality where central bankers claim to have abandoned Forward Guidance and then give us specific numbers for future interest-rates. In many ways 5.4% is as specific as they have ever got. That gets us to the crux of the issue because they actually believe that the ordinary person takes notice of them. I used to think of that as a pure fantasy but after all the errors it is more than that.

Every man has a place, in his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky, on our ship, Fantasy
All your dreams will come true, right away ( Earth, Wind & Fire)

The only people who believe this are the central bankers and their media acolytes. In their journey towards becoming politicians they sold their souls to the idea of Public Relations. In this instance that means that if you think  you may have to reduce interest-rates later in 2023 tell everyone first about your plans to raise them. That is the road on which the Fed’s biggest “Dove” has become an apparent “Hawk”

Meanwhile if we switch to the real world we see that 2023 has started with evidence going the other way. Inflation numbers have fallen, as has the price of crude oil, China is struggling, and a mild winter in Europe has meant gas prices not as high as feared. That is why the US ten-year yield is 3.7% because it is looking ahead of the next rise ( presumably 0.25%) to what happens next?

 

 

The central bankers have been forced into promising even more interest-rate rises

Yesterday was an intriguing day and no I am not referring to the record numbers watching Flight Radar to follow the flight carrying Nancy Pelosi to Taiwan. What we saw was a stepping up of open mouth operations by policymakers at the US Federal Reserve.

Aug 2 (Reuters) – The Federal Reserve’s work of bringing down inflation is “nowhere near” done, San Francisco Fed President Mary Daly said on Tuesday, adding U.S. central bank officials are “still resolute and completely united” in the task of achieving price stability.

She also denied that the Federal Reserve would switch to cutting interest-rates next year.

“That would not be my modal outlook,” she said. “My modal outlook, or the outlook I think is most likely, is really that we raise interest rates and then we hold them there for a while at whatever level we think is appropriate.”

She presented herself as a doughty inflation fighter.

“The number of people who can’t afford this week what they paid for with ease six month ago just means our work is far from done,” Daly said.

That is quite a change of view from someone who was previously an inflation fan. From February 2020

(Reuters) – A top U.S. central banker on Monday called for using new tools to push up stubbornly low inflation as an aging population slows economic growth worldwide and globalization and other trends keep a lid on prices.

“We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment,” San Francisco Federal Reserve Bank President Mary Daly said on Monday in remarks prepared for delivery in Dublin, Ireland.

So she has what she wished for. Indeed in 2021 she got the opportunity to vote for it. Apparently she is now not so keen or more realistically is afraid of what the response would be if she said that now.

This backed up the words of another Federal Reserve policymaker Neel Kashkari from last week.

“Whether we are technically in a recession or not doesn’t change my analysis,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CBS’ “Face the Nation” on Sunday. “I’m focused on the inflation data. I’m focused on the wage data. And so far, inflation continues to surprise us to the upside. Wages continue to grow.” ( CNBC)

This was rather awkward for the man most associated with the policies that helped push inflation higher in the first place. In fact markets simply ignored him as a man with zero credibility.

The barrage of open mouth operations continued though.

In a separate interview on Tuesday, Chicago Fed president Charles Evans said he thought that a 0.5 percentage point increase at the next meeting in September would be appropriate. However, he left the door open to a larger 0.75 percentage point rise, which he said “could also be OK”. ( Financial Times)

A decade or so ago Charles Evans made the case for inflation at 3% or 4% to “catch up” on inflation being below target. This was based on the now abandoned claims from central bankers that they had the “tools” to reduce above target inflation and could do so easily. That was a complete lie as the present situation is showing. Sadly they never get challenged on this.

But I have selected these 3 because they have for years sung along with Prince.

This is what it sounds like
When doves cry

What does this mean?

We got some actual numbers from the President of the St.Louis Fed in a speech from New York.

Fed‘s Bullard: Repeats Wants Policy Rate At 3.75%-4% By Year-End – Fed Needs To Get Into More Restrictive Rates Territory ( @LiveSquawk)

He is in a different category to the others mentioned so far as he has been keener on dealing with inflation, but he does seem to have a bit of a problem with these thoughts.

The Fed and the ECB have considerable credibility compared with their 1970s counterparts, suggesting that a soft landing is feasible in the U.S. and the EA if the post-pandemic regime shift is executed well.

I would ask what is he smoking? But I doubt that there is anything strong enough to make you think that. As Earth Wind & Fire put it.

Every man has a place, in his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky, on our ship, Fantasii
All your dreams will come true, right away

We can now switch to the apparently rather similar thoughts of Charles Evans.

Evans noted that he thinks rates will have to rise to between 3.75 percent and 4 percent by the end of next year but cautioned against too quick a path to get there should the Fed have to retrench unexpectedly on the back of a changing landscape. ( thenews.com.pk)

So the same level but later. Although he is not much good at predicting the future.

April 19 (Reuters) – Chicago Federal Reserve Bank President Charles Evans on Tuesday said the Fed could raise its policy target range to 2.25%-2.5% by year end.

It is already there.

Comment

Let me start with what the Federal Reserve is trying to so here. It is not a coincidence that so many Fed speakers have appeared at the same time to sing in a chorus. The problem with attempting to set an agenda via open mouth operations comes from their most recent policy move.

“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” Powell said, noting that there will be two full months of data before the Fed’s next meeting, in September. ( Reuters)

That was an abandonment of Forward Guidance which had become very strict even involving leaking interest-rate moves to Nick Timiraos of the Wall Street Journal. Now we are only one week later being guided again via all these speeches.

The reason for this is something that I have regularly pointed out which is that markets were ignoring the interest-rate rises and instead concentrating on the upcoming expected deterioration in the economy. So 1.5% increases in official interest-rates were accompanied by the benchmark ten-year yield falling by more than 0.8%. This left the Fed in quite a mess because they thought they had been clever in letting the rise in bond yields do the inflation fighting for them. The most obvious example of this is the way that the 15 and 30 year mortgage rates rose. But now they will be falling just as inflation has soared leaving the Fed with yet more egg on its face.

The response has mostly been we do not believe you.

But the comments from Daly, Evans and Mester moved futures markets, with expectations for where the Fed’s benchmark policy rate will stand in December rising from 3.27 per cent on Monday to 3.39 per cent on Tuesday.

Yes bond yields rose but by much, much less than the amounts they had fallen by.

Oh and it was the central banks that created this although the Financial Times fails to mention it.

Investors also cautioned that liquidity in the Treasury market — the ease with which traders can buy and sell — is poor, with many market participants on holiday this month. A deterioration in liquidity can lead to big swings in the price of securities.

Not the holiday season as they did not create that! The fact is that everywhere QE has gone liquidity has worsened with the extreme case being Japan where at times it has been non-existent.

So when you see more open mouth operations today you now understand why….