I have two pieces of information
before me on my desk. One is from Winters & Co. Advisors, LLC, an
investment agent who I have worked with over the years. The Winters document
contains a chart showing the swap yield curve for the last 4 years based on
today’s date (swap rates tend to closely follow same maturity treasuries). The
most recent 2 years shows an inverted yield curve in the 4% to 6% range. The
curves for 2020 and 2021 show normal sloping curves in the range of 0% to
1.95%. The second document is a short story from the Wall Street Journal of
today with the headline, “As inflation cools, economists see soft landing for
US”. What a ride we have had for the last two plus years. We have been riding
the Fed induced rollercoaster since mid-2021 when inflation started its climb from
the benchmark of 2% (4.2% - Apr 2021) to its high of 9.1% in June of 2022. It
slowly trended downward through the balance of 2022 and finally was back down
to 3% in June of this year. The rate trended up to 3.7% through September and
is 3.2% for October according to US inflation Calculator
(usinflationcalculatior.com/inflation/current-inflation-rates/). Remember, the
Fed moved the goal posts last year when it said that they would be happy if
long term inflation would stay in the 3.0% range as opposed to its 30 year
target range of 2.0%. The Wall Street article states “Economists continue to
see the US economy approaching a soft landing as inflation data comes in better
than expected, with little signs of impending recession. This would mark the
first time in 80 years the Federal Reserve has brought down inflation without
triggering a recession.” Not bad if it does happen, i.e. no recession triggered.
However, the Fed doesn’t have a very good track record and they did move the
goal posts to make it easier to claim success. So, change the rules, take 2 ½
years to do something that many times (one can’t say normally in economic
situations) takes 6 to 8 months and declare victory at the new levels, maybe. I
see that the Wall Street group is the first on the soft landing band wagon in
this current time period. Do you remember the movie Those Magnificent Men in
Their Flying Machines (1965 comedy). It goes on to say something like, they go uppity up up, they go
downdity down down. I am afraid we have been doing the up down routine along
the bottom of the economic landscape for the last 2 ½ years.
No, we
haven’t had an official recession yet but we haven’t had much growth in the
economy either. We have a very high Federal Fund rate that looks to stay high for
some time to come according to Chairman Powell. In the Associated Press article
of November 1, 2023, “Federal Reserve leaves its key rate unchanged but keeps
open possibility of a future hike” I quote;
The central bank’s latest statement
noted that the economy “expanded at a strong pace” in the July-September
quarter and that job gains “remain strong.” And it reiterated that future
rate hikes, if the Fed finds them necessary, remain under consideration.
But it also acknowledged that
recent tumult in the financial markets has sent interest rates on 10-year
Treasury notes to near 16-year highs and contributed to higher loan rates
across the economy — a trend that helps serve the Fed’s goal of cooling the economy
and inflation pressures.
Powell himself suggested that Fed
officials remain unsure about whether further rate increases might still be
needed to defeat inflation. That stance marks a shift from earlier this year,
when the policymakers had made clear that they leaned toward pushing rates
higher.
I am curious to see if the Fed will
consider inflation beaten at a 2% rate or the newer Fed suggested 3% rate. It
sounds like the Fed is watching and ready to hike the Fed Funds rate more if
necessary. Not a strong sign of reduced volatility as the higher rate tends to
make other aspects of the economy volatile and unpredictable. The good
news is the Fed hasn’t forgotten about the huge balance sheet problem which is
and was one of the primary driving forces for the inflation explosion in the
first place. Remember the huge balance sheet was fueled by artificially low
borrowing rates for so very, very long. In a Reuters article of October 31,
2023 I again quote;
The eventual end of the Federal
Reserve’s efforts to reduce its vast bond holdings increasingly appears tied to
what happens with the central bank's "reverse repo" operations.
The program, launched nearly a
decade ago, grew rapidly starting in the spring of 2021 and by June 2022 was
consistently taking in more than $2 trillion a day in what was seen as clear
evidence of the amount of excess cash sloshing around the financial system.
Inflows have dropped sharply in recent months to around $1 trillion in the face
of the Fed's aggressive policy tightening underway since last year.
Lou Crandall, chief economist with
Wrightson ICAP, a research firm … reckons the Fed still has time in this
process, and speaking earlier this month, Cleveland Fed President Loretta
Mester agreed.
"We still have a very large
balance sheet" so the balance sheet cuts can likely continue over the next
year and half to two years, she said, adding when it comes to getting to the
finish line, "it's going to take a while."
So, what might we see regarding inflation, economic growth, and a return to normal (whatever normal may be 😊)? Well, that’s just it. I suspect more of the same which is a fair amount of uncertainty and ambiguity plus a large dose of prevarication by the various economic gurus, and financial and governmental leaders. I am afraid we aren’t going to know until we know. Or at the very earliest after the fact (yup, after the fact). Not much comfort. However what you can do is stay conservative in your investments. Don’t concentrate your holdings but spread things out. Don’t go for financial or investing fads. Save as you can, spend less, and find ways to enjoy things more like family, friends, the beauties around us. Don’t worry to much about the economy. It has survived several other difficult times regardless of what people, institutions and governments do to it. Things will of course certainly, almost without fail, very likely, probably, in most cases solve themselves, we think. (But don’t quote us on that.)
Articles cited.
Federal Reserve leaves its key rate unchanged but keeps open
possibility of a future hike
Fed’s reverse repo facility drawdown looms large in balance
sheet debate
