Absolutely magnificent piece. I heard Dave Dredge of Convex Strategies discuss curve steepening on Grant Williams last fall and it stuck in my brain. This article added clarity to my thinking. Thank you.
It's impossible to know the real strategy, if there is one, of the Fed and it's machinations. I would prefer to let the markets determine rates and leave the voodoo-ism on the sidelines. Trying to micro-manage interest rates is beyond silly. Supply and demand is as good as anything in determining natural rates. It's only at the extremes that the Fed should intervene.
Absolutely the most insightful and important article I’ve ever read about the Fed and interest rates. Cements my view of entrenched inflation for the foreseeable future.
Great piece this week! I would be shocked to see them adjust that long-run estimate upwards before the September or December dot plots. Total speculation on my part, but by September few would really argue the 2022 rate hikes haven’t taken effect in the markets. So if inflation and the markets are still showing strength, the Fed might finally be desperate enough to move it up?
The UK Gilt market has been rather interesting this week and looks to be so going forward. The BoE sold all gilts it bought in the panic, so it will be interesting to see if they're at that level again. IMHO it's the pace things happen which spooks CB's.
Turning to the USA, another reason for the persistent bid to the long end has been the increase in Stripping as Pension Plans lock in overfunded positions.
Good article, and your reasoning regarding the "Long term estimate" is sound, but I think there is an even simpler answer. With the LTE they are simply aiming towards their 2% target and the falling curve simply indicates that they see it coming closer and it shows they are determine to get there.
So I don't think it's any YCC per se but if market see it that way I think it over-interpret the whole thing and contributes to the process of prolonging the normalization.
Thanks for the writeup! I have one question - the market for long-term treasuries is HUGE. Does that entire market really just follow the soft guidance from the Fed, or is it the market saying this inflation is truly transitory?
The tldr; is that monetary policy influences the private sector which then influences monetary policy which influences the private sector ...
The authors discuss at length the Fed being pinned by the private sector in a liquidity trap ... but neglects going into detail about the private market pinning the Fed in an expectations trap.
And what you're describing to me sounds like an 'expectations trap' though of a different sort than the one that happened in the 1970s. Investors en masse expect the Fed to keep long term rates anchored.
I always look forward to your insightful articles.
Can you make an update about Evergrande and Chinese banks? Haven't heard about that for a while
Absolutely magnificent piece. I heard Dave Dredge of Convex Strategies discuss curve steepening on Grant Williams last fall and it stuck in my brain. This article added clarity to my thinking. Thank you.
It's impossible to know the real strategy, if there is one, of the Fed and it's machinations. I would prefer to let the markets determine rates and leave the voodoo-ism on the sidelines. Trying to micro-manage interest rates is beyond silly. Supply and demand is as good as anything in determining natural rates. It's only at the extremes that the Fed should intervene.
Awesome analysis of the Dot Plot re: Fed strategy. It helps simplify analysis of the multitude of market signals. Thank you!
Absolutely the most insightful and important article I’ve ever read about the Fed and interest rates. Cements my view of entrenched inflation for the foreseeable future.
Awesome article. Looking forward to your next.
Great piece this week! I would be shocked to see them adjust that long-run estimate upwards before the September or December dot plots. Total speculation on my part, but by September few would really argue the 2022 rate hikes haven’t taken effect in the markets. So if inflation and the markets are still showing strength, the Fed might finally be desperate enough to move it up?
I love reading this, you make me ask very valuable questions, thank you for your writings TLBS! Keep it going! Today with extra caffeinated coffee ;)
Nice work LBS!
The UK Gilt market has been rather interesting this week and looks to be so going forward. The BoE sold all gilts it bought in the panic, so it will be interesting to see if they're at that level again. IMHO it's the pace things happen which spooks CB's.
https://www.bankofengland.co.uk/news/2023/boe-completes-unwind-of-recent-financial-stability-gilt-purchases#:~:text=In%20total%2C%20the%20Bank%20purchased,portfolio%20of%20temporary%20gilt%20holdings.
Turning to the USA, another reason for the persistent bid to the long end has been the increase in Stripping as Pension Plans lock in overfunded positions.
https://www.bloomberg.com/news/articles/2023-01-28/pension-funds-with-a-historic-surplus-eye-1-trillion-of-bond-buying
cheers!
Highly anticipated best spot on analysis, as always
Really interesting, this is a novel perspective for me. Will definitely share.
Good article, and your reasoning regarding the "Long term estimate" is sound, but I think there is an even simpler answer. With the LTE they are simply aiming towards their 2% target and the falling curve simply indicates that they see it coming closer and it shows they are determine to get there.
So I don't think it's any YCC per se but if market see it that way I think it over-interpret the whole thing and contributes to the process of prolonging the normalization.
Thanks for the writeup! I have one question - the market for long-term treasuries is HUGE. Does that entire market really just follow the soft guidance from the Fed, or is it the market saying this inflation is truly transitory?
Great writing...Question: What would cause the Fed to loose the long end of the curve and does it have a medium to high probability?
Your commentary is thought provoking ... and it feels like it's headed in the right direction. It brings to mind this working paper:
"The Natural Rate of Interest Through a Hall of Mirrors"
https://www.federalreserve.gov/econres/feds/files/2022010pap.pdf
The tldr; is that monetary policy influences the private sector which then influences monetary policy which influences the private sector ...
The authors discuss at length the Fed being pinned by the private sector in a liquidity trap ... but neglects going into detail about the private market pinning the Fed in an expectations trap.
And what you're describing to me sounds like an 'expectations trap' though of a different sort than the one that happened in the 1970s. Investors en masse expect the Fed to keep long term rates anchored.
Anyways as always enjoyed reading.