The idea is that raising wages pushes strong growth (see Covid and stim payments) - and hence defaults are needed to keep total inflation in control. The opposite when real wage growth is low, you need to keep debt markets working to get inflation up....
I don't see how longer-dated treasuries (10y+) can go lower in yield from here:
The 2-year at just over 4% has essentially priced in the next 100bps of FFR cuts.
The 10-year is only a tiny bit above the 2-year, yet historically has averaged around 100bps higher for the term premium.
I think we're about to see a hybrid bull/bear steepener: short rates will continue to be cut to an extent, but long rates will rise as the bond market loses confidence in the Fed's inflation fight - similar to what happened between 1983 & 1984, when the 10-year spiked to 14% despite inflation having peaked in 1980.
The big risk is - artificially driven (non-market) yield caps, to keep the federal government solvent. This would of course spark a run on the dollar, and be very bullish for gold (as if there weren't enough reasons already)
The effect on the equity market however is indeterminate, it could go either way.
The Fed seems to lean on the unemployment rate as a justifier for lowering rates, again and again. The unemployment rate is mostly determined from shitty jobs that pay shitty wages. The cumulative result is bat shit crazy high asset prices, supporting a sky high mountain of dubious debt.
it was deflationary for large part of "rest of the world" which I think was the main intention, or at least one of the main intention s of rising rates
"So here is the trillion dollar question. Was the Federal Reserve rate increases only deflationary for Chinese assets? Was the pressure that it put on the Chinese Yuan leading to weakness in the Chinese property market? The original idea of needing asset price weakness to keep inflation in check was correct - but only in terms of Chinese asset prices? Given the size of the Chinese economy and property market, this could well be true."
1. too manny banks were/are underwater if they would mark to market everything/more than now, at higher rates
2. it eases the costs of interest for the federal budget
3. all the rich have real estate, stocks etc
4. powerful private equity needs lower rates
"Why the Federal Reserve wants to cut interest rates when house prices are pushing higher from already high levels is a mystery. The decision making and the thought process of Federal Reserve governors is extremely poor for people with that much power. It is pretty muc..."
I see the Fed as reactive. If real wages rise, then all assets are pushed higher as well without restricitve monetary policy. All depends on government policy - Fed is an endogenous variable within that.
Russell, you do not think the Fed lowering rates has more to do with its debt level then why they may cut and/or raise in the past?
The idea is that raising wages pushes strong growth (see Covid and stim payments) - and hence defaults are needed to keep total inflation in control. The opposite when real wage growth is low, you need to keep debt markets working to get inflation up....
I don't see how longer-dated treasuries (10y+) can go lower in yield from here:
The 2-year at just over 4% has essentially priced in the next 100bps of FFR cuts.
The 10-year is only a tiny bit above the 2-year, yet historically has averaged around 100bps higher for the term premium.
I think we're about to see a hybrid bull/bear steepener: short rates will continue to be cut to an extent, but long rates will rise as the bond market loses confidence in the Fed's inflation fight - similar to what happened between 1983 & 1984, when the 10-year spiked to 14% despite inflation having peaked in 1980.
Once the US election is out of the way, the US government will get back to spending as well in my view...
The big risk is - artificially driven (non-market) yield caps, to keep the federal government solvent. This would of course spark a run on the dollar, and be very bullish for gold (as if there weren't enough reasons already)
The effect on the equity market however is indeterminate, it could go either way.
The Fed seems to lean on the unemployment rate as a justifier for lowering rates, again and again. The unemployment rate is mostly determined from shitty jobs that pay shitty wages. The cumulative result is bat shit crazy high asset prices, supporting a sky high mountain of dubious debt.
All true - but when does it end?!?
No clue
it was deflationary for large part of "rest of the world" which I think was the main intention, or at least one of the main intention s of rising rates
"So here is the trillion dollar question. Was the Federal Reserve rate increases only deflationary for Chinese assets? Was the pressure that it put on the Chinese Yuan leading to weakness in the Chinese property market? The original idea of needing asset price weakness to keep inflation in check was correct - but only in terms of Chinese asset prices? Given the size of the Chinese economy and property market, this could well be true."
There are 2 main reasons, in my opinion:
1. too manny banks were/are underwater if they would mark to market everything/more than now, at higher rates
2. it eases the costs of interest for the federal budget
3. all the rich have real estate, stocks etc
4. powerful private equity needs lower rates
"Why the Federal Reserve wants to cut interest rates when house prices are pushing higher from already high levels is a mystery. The decision making and the thought process of Federal Reserve governors is extremely poor for people with that much power. It is pretty muc..."
5. real estate is collateral for enormous amounts of bonds/loans
I see the Fed as reactive. If real wages rise, then all assets are pushed higher as well without restricitve monetary policy. All depends on government policy - Fed is an endogenous variable within that.