The Federal Reserve hasn’t raised its Fed Funds target rate since the latter half of 2006. Even with near zero Fed Funds effective rates, US 1-4 family mortgages outstanding (red line) have only just turned positive in YoY growth.
Here is a chart of 1-4 family mortgages outstanding and The Fed Funds Effective Rate. Zero rate policies haven’t really helped the 1-4 family residential mortgage market (partly because a number of the mortgage products during the last decade have been curtailed such as pay option ARMs and NINJA (no income, no job) loans.
Even bank credit in general is still growing more slowly than during the last decade. The slow growth is a combination of increased regulation of the banking system (Dodd-Frank, Consumer Financial Protection Bureau) and lower household incomes (and slower wage growth).
The slower growth of bank credit in this decade (coupled with lower household income and tighter consumer lending regulation) has resulted in historically low levels of the M1 Money Multiplier and M2 Money Velocity.
Will The Fed raise the Fed Funds target in September? Vice Chair Stanley Fischer stated in Jackson Hole Wyoming that The Fed shouldn’t wait for the economy to hit 2% inflation.
Great. Now that 1-4 family mortgages outstanding growth has FINALLY become positive, The Fed wants to raise rates.
It is indeed a wild ride!
The annual Federal Reserve retreat in Jackson Hole is underway and the theme of the conference is Inflation Dynamics and Monetary Policy.
I wonder if any of the participants noticed that Core Inflation for July was released this morning and it shows that it has been dropping since 2012 … and is only 1.235% YoY?
The core PCE deflator — the Fed’s preferred metric of core inflation — rose 0.1 percent in July (0.07221 unrounded). This was sufficiently weak to allow the year-on-year growth rate to slip to 1.2 percent from 1.3 percent previously. While a one-tenth deceleration is certainly not dramatic, it is unusual given that this metric has held steady at 1.3 percent in every month of the first half of 2015. It has not been below 1.3 percent since March 2011. It is hard to see how the July income and spending report will reinforce policy makers’ confidence in a rebound in inflation toward their target.
And the economic surprise index is painfully negative.
So will The Fed raise the Fed Funds rate in September? The futures data says no. The implied probability of a hate hike is 30%.
Finally, Q3 GDP according to the Atlanta Fed’s GDP NOW tracker has fallen to a measly 1.2%.
I wonder if any of the participants at Jackson Hole are looking out the windows for Jackalopes? Here is a photo of Fed Chair Janet Yellen riding one.
Apparently, The Fed has been jawboning a possible Fed Funds Target increase so often that interest rates have actually increased. Much like the old EF Hutton ads.
According to Reuters, China’s Peoples’ Bank of China official blames planned U.S. interest rate rise for volatility. In fact, the PBOC is calling on The Fed to delay any increase in the Fed Funds Target Rate.
At the same time, China is dumping US Treasury bonds to support the Yuan.
And today the Q2 2015 revision was released showing that Q2 2007 GDP growth jumped to 3.7% from 2.3% leading to speculation that The Fed may indeed raise rates in September.
Too late PBOC! The 2 year Treasury yield has already risen 25 basis points since January 31. Call this the stealth Fed rate increase.
The yield curve has risen as well since January 2015.
Apparently, the relentless jawboning by Yellen, Fischer, and the other Fed governors have helped achieve the 25 basis point rise in rates already.
When The Fed governors talk, people listen.
The Financial Market Rollercoaster is on the upswing today!
The Dow Jones Industrial Average is up 619 points today.
And since January 1st, you can see the rollercoaster.
The 10 year Treasury yield is up 10.4 basis points.
The US is the biggest mover in Treasuries after the NY Fed’s Dudley sounded particularly dovish.
The probability of a September rate hike has fallen to 24%, according to futures data.
Graphically, here is the probabilities of a rate increase.
Strange days indeed. Another cliffhanger on Wall Street with the DJIA rising to over 350 points after opening, only to crash to -250 points by closing.
The decline in the Dow is even more noticeable over a 1 year window.
The VIX measure of S&P500 volatility exploded over the past few sessions.
What happened? Crude oil futures prices declined yesterday, but rallied this morning. Then, started going down again.
US Treasury 10 year yields rose over 8 basis points. It isn’t helping that Lockhart of the Atlanta Fed and others are hinting about a rate increase in September.
From China With Love!
China’s economy is contracting thanks to declining manufacturing.
And despite China’s devaluation of their currency.
The US Dow Jones Industrial Average is down over 1,000 points at opening, but is down only” 460 points as of 10:14am EST.
Crude oil futures are down 7% to under $40.
Big trouble in Big China is a problem.
Everyone seems focused on international equity markets. And here is why!
The Shanghai composite index is down 8.5%.
But lost in the equity headlines is that 1) crude oil futures are down below $40 and 2) the 10 year US Treasury yield have broken through 2%.
Yes, it is the “Walter White” financial market.