The Fed Being Too Tight Now Is Just Silly

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August 16, 2015,  The Fed And The First Rate Hike

https://loganmohtashami.com/2015/08/16/fed-and-the-first-rate-hike/

 “In an interview with Bloomberg. I said they need to change their metric because unemployment is dropping too fast due to the Labor participation rate.” 

  “Another view I’ve held for years is that they should raise their inflation metric to 2.25%-2.50% on PCE.”

 “I am sticking to my model that 3% FED Funds and 3.7% on 10’s are recessionary rates with some duration after these levels”.

For many years I have written about how the Fed would need more inflation to warrant more aggressive rate hikes.

In 2016 I wrote:

Fed Rate Hikes Need More Inflation

https://loganmohtashami.com/2016/04/15/fed-rate-hikes-need-more-inflation/

In 2017 I wrote:

Fed Still Needs More Inflation

https://loganmohtashami.com/2017/02/07/fed-still-needs-more-inflation/

In November of 2018, I wrote this article with my own model on what a neutral Feds Fund rate should be

The Fed Still Needs More Inflation: 2018 Edition

https://loganmohtashami.com/2018/11/29/the-fed-still-needs-more-inflation-2018-edition/

The Fed Needs More Inflation 2019: Edition 

https://loganmohtashami.com/2019/06/19/the-fed-needs-more-inflation-2019-edition/

However, using my own model the Fed talk about being too tight with the 10-year yield at 1.59% and 2 rate cuts and the market anticipating the third one is just silly.

CPI core inflation is at cycle highs, nothing too drastic but vs. the 10-year yield at 1.59%, come on, man. This is an 80 basis point spread between the two now. To say that long term rates are too high vs. core inflation is silly.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/09/16/inflation-an-x-ray-view-of-the-components

September Inflation breakdown short

A lot of people didn’t agree with the Fed’s forecast for more hikes in 2019 and even with the December hike. However, we are past that phase now. We are in rate-cutting mode, and yields are lower, which is stimulating the economy. Just look at housing data this year and the V shape recovery we have since in that sector.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/10/01/treasury-yields-a-long-term-perspective

October Fed Funds Rate
September EHS
October Pending home sales

October new home sales adj pop

september-permits-5y

But, but the dollar is too strong!  The sad reality of seeing people scream about the dollar collapse to now the dollar is too strong.

The dollar makes its most significant % move before the first rate hike. It typically doesn’t do much after that. This record-breaking expansion is putting us into a new data line territory.

However, the dollar, even with the rate hikes since late 2015, was heading lower since the cycle peak.

What event at the Start of 2018 could have possibly made it harder for world growth or investment takes place with certain countries at the start of 2018. Hmmm, let me think about this.

The dollar has been getting stronger since the trade war tap dance started, even with rate cuts, even with failing yields because our economy has been outperforming the world and we are now stimulating it with rate cuts. We are not so relied on trade or PMI data like other countries.

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Count how many sub 50 PMI prints we have had in this cycle since the Great Recession ended and not one time, not ONE time did it lead to a U.S. recession. All it did was lower the rate of growth which is still better than Europe and Japan.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/09/16/inflation-an-x-ray-view-of-the-components

October ISM 47.1

President Trump, Bernie Sanders, and Elizabeth Warren will have to realize we are the only economic superpower left in the world. We have a massive young workforce that will replace our older dying population, and they will consume goods and services. Other countries around the world don’t have this luxury going out for decades. So, if you’re begging for the dollar to collapse anytime soon.

A. Resolve this trade war tap dance with a deal so these other economies can do better like we saw in 2017 when the dollar was falling as the world economies were doing better.

B. Do a massive government intervention where we actively devalue the dollar and prop up other currencies.

Or just cry that the dollar is too strong, that the American economy is too strong for the world. You know that is more fitting for some people I believe.

Once there was a Republican Conservative Pro Capitalist Party in this country that used to say this.

The Economy Hates Undercertainty! How could companies invest or make decisions If they have no idea what the Government Policies Are Going To Be.

Now, we are crying about King Dollar and the Fed Funds rate is too tight   #SAD.

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Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami