Mid this week FOMC chair Jerome Powell in front of a legislative public speaking event, for the first time mentioned that the FOMC could not decrease oil prices and food prices via faster interest rate hikes.
OK, we may take issue with this slightly because if they beat demand down enough, it will most certainly put headwinds to higher prices of both of these assets. However more importantly, this was possibly the first sign of a less aggressive FOMC, again shared by Jerome Powell.
Instantaneously capital markets took notice of the comments with a much happier tone as did interest rates with an extremely happier tone as well…
Interestingly, and speaking out loud to everyone our thoughts, just two weeks ago, a much harsher tone was voiced by Powell …given that fact, it’s way too soon to say the FOMC has taken their foot off the brake a little bit ….. Heck we still have a lot of economic data to get through for the next few quarters… some of which may be very hot and could have the federal reserve reverse course once again… but maybe it is a start..
We will be watching, but wanted to let you know a possible interesting breadcrumb that occurred this week.
Hot Hot Hot
With an unusually, extremely, hot summer shaping up here in the south, breaking hundred degree days by the week, we wave goodbye to the longest day of the year with less sorrow this year and a bit of trepidation on what August … the seasonally hottest month of the year may bring.
Kvale front yard, watered daily !
Still better than ice and snow that no one here, present party included, knows how to drive on!
Today is a Friday, getting near Fourth of July midpoint of the year, enjoy your day and your weekend, and if you’re near us, stay hydrated and be careful out there!
Last Friday, June 10, 2022 the BLS (Bureau Of Labor Statistics) released their monthly data on the CPI (Consumer Price Index – Great Analysis Link Here) Most blunt measure of inflation — Ok lots of abbreviations but stick with us for the main takeaways…
For the record we called a possible top here, and while the increase of the CPI was only .4% than the prior month, it was NOT a deceleration YET…
Bottom Line Result
Cutting to the chase for those with little time – This hotter report will give the FOMC (Federal Open Market Committee) led by Jerome Powell a green light for further tightening faster – creating a faster slowing of the economy…
Quick FOMC Fed Funds Analysis – The Rate Increase Measure
(Take note once again, the first rate hikes on far left of chart took three years…. the next rate hike cycle ..one in middle right, took almost FOUR years… this one MAY be literally months… again this fits our thesis of headwinds came fast and are behind us (Look Forward not Back)– had to put that plug in while we were on the topic…)
CPI Analysis – What’s the Hold Up
With Owners Equivalent Rent/shelter being a very large portion of the CPI component…. its fast turn around is holding the CPI Up along with food inflation as well….
Note that far right movement up….
Oh and oil prices moving higher did not help either…..
Bottom line, continued FOMC rate increases, faster slowing of the economy, eventually… lower interest rates faster …..
Sorry for the heavy Monday, but wanted to get it out there to you guys as it helps us clarify as well!
Back to Basics Series – Estate Planning – No Fears of Fancy Terminology
In our continued fun “Back To Basics” Series here we discuss Estate Planning…
From the post:
Rather than go into the complexities of all of the documents, keeping with our “Back to Basics” theme, we are going to go into what you need to think about to easily complete all of your Estate Documents. Don’t worry about the fancy legal and financial terms, if you can answer the following few questions, your Estate Documents can be easily completed …
The hardest part of doing an Estate Plan is just starting…. Go ahead and read this post if you have been procrastinating its not hare once you start!
Lump Sum Offer Reminder
After running into an unusual offer from a Pension Buy Out, we reminded ourselves these generally come in Waves….
Trust But Verify, offers can be wildly in accurate!
Capital Market Comments
Look Forward, Not Back
In this early month post here, we discuss Jerome Powell’s 180 turn from stimulus to brake and in particular as it relates to interest rates…
Then again in a similar post an update on Interest Rates….
While counter intuitive, as the FOMC/Jerome Powell raise interest rates, historically interest rates eventually fall as the Brake action kicks in and slows the economy
The extra speedy move of interest rates upward have put pressure on “Safe” assets, notably bonds or fixed income.
As reviewed here in great detail and with a special video on the subject, as rates rise, headwinds are created, BUT the opposite is true…. rates stabilize or even lower, big tailwinds…
Have Rates Peaked ?
Using the 10 year treasury as our marker for this review, after peaking 3.15% a few weeks ago, rates have come in and are now around 2.76% …. Progress and stability!
Here is a zoomed in chart….
Just like the change from Winter to Spring to Summer, it rarely occurs in a straight line…. remember also this longer term rate (10 years) is a measure of economic growth and will not be directly effected by the Federal Reserve overnight rate increases (thats our checking accounts)…
We don’t want to get too heavy and pound you with market thoughts, we know you’re getting enough of that from the “Market in Turmoil” like headlines, but we did want to give some explanations and let you know we are watching carefully as we have been on notice since December for a possible slowdown.
Look forward, not back
Economic reports such as today’s CPI (consumer price index) report is very much rearview looking, as such it’s sometime easy to forget that what’s most important is looking forward to what is going to happen next rather than backwards to what has happened. Yes it is much harder, and you do not know exactly what is going to happen … but you sure do not drive a vehicle looking continually in the rear view mirror – some humor on a dry subject… stay with me!
This is even more evident at the recent quick rise in interest rates, creating the headwinds to bonds. As noted here and again here in our posts (the second with even a special video) it’s highly likely and the probability is most that the headwinds for our fixed income investments are behind us. Once again looking forward, a slow down usually garners lower interest rates, exactly opposite to our slightly current and mostly rearview looking higher rates.
FOMC chaired by Powell gave and now takes
Over the past 18 months to two years the FOMC (Federal Open Market Committee) headed by Jerome Powell have taken very aggressive measures to stimulate the economy. Much of a stimulation, once the book is written may have over stimulated not only the economy but various asset prices. Their goal at this time is to slow inflation thereby doing a complete turnaround from their prior stance and taking away stimulus. This most likely will continue until they see evidence of slower inflation or lower employment.
Higher rates are their main instrument of choice:
The FOMC waits for the reports such as the CPI to confirm their decisions, making for a lag in decision making and possibly longer decision-making, but they will eventually get there….
Finally, capital markets are certainly looking forward hence the sluggishness as they begin to price in a slowdown in full force. Eventually it’s very likely the FOMC will begin to see these clues as well!
Happily, the schedule shows several road trips in the next few weeks making for a fast May …. Nothing air related, but a nice drive in all different directions in a return to normal…. as also mentioned in our Three Positives Happy Post here mid week….
FED Increases Rates – Jerome Powell
Mid Week, as expected the FOMC (Federal Open Market Committee) led by Jerome Powell increased the Fed Funds Rates (think our checking accounts) by 1/2 Percent or in Wall Street Speak, 50 basis points… We will talk more about this soon, but wanted to let the Capital Market Dust Settle before diving in….
Friday in the South – Heated Weekend
With near 1000 followers … many from all over the country of friends and clients we like to toss you the rollercoaster ride of deep South Texas weather every once in a while … a high 40 degree mid week start of the day to only top out at 60 this week, was a cool spell …. this weekend Donald the Brain hits 100 in his neck of the woods and we are expecting mid 90’s…
That is ok the cold, rain and ice are gone… Lot’s of water, sunscreen, shade and no extended time in the first round of heat….
Have a Great Friday and super Weekend- Talk next week!
Frequently Saturday morning is met with several long time acquaintances as our paths cross in timely fashion at the local Starbucks.
After a few pleasantries, the normal economic and market update question was presented. Maybe it was the extra restful sleep, maybe it was just starting the weekend out bright with a new thought, either way this possible Epiphany was worth sharing.
FOMC Talks Rates Up
What if the federal reserve, FOMC led by chair Jerome Powell were able to aggressively talk interest rates up, which they have done, but not actually have to raise rates near to the level of their chatter?
Currently using our Old Faithful CME Fed Watch interest rate tracker tool….8-10 Yes (8-10 WOW) normal rates priced into markets by July 2022…
95% Chance/Market Expecting/Pricing a 1.75% to 2.25% Rate by July – currently rates at .25%-.50%
So why would the federal reserve want extra room to not have to raise rates? If the economy naturally slows or goes into a recession and the Federal Reserve has raised rates very little it could be easily construed that they could say it wasn’t their fault!
Longshot, maybe, but if we were sitting in their perch that would be a nice safety net to have!
We listen and constantly research different thoughts by different folks and have not heard this in any venue!
So you heard it here first, thanks Starbuck buddies, for the new possibility!
With multiple comments over the last few weeks and a pick up in headlines concerning interest rates, we decided to do an analysis and review! We also have added a video to help explain some of the complexities associated with rates and bonds … as while at face value bonds are a simple animal, their movements can be puzzling.
The main reason for the increased headlines and comments are when rates go up, the value of bonds goes down initially, and rates have really jumped dramatically for various reasons.
Briefly as a reminder, Bond aka Fixed Income aka corporates aka treasuries aka high yield aka Fixed Income instruments are nothing more than a note with an income stream to the purchaser of the bond! There is a saying the bond market is “Smart” because you only have to worry about the ability and willingness of the lender to pay… nothing else…
Rates and Bonds – I Go Up, You Go Down
The Green line is the yield on the 10 year treasury… The red is a huge bond fund from Vanguard called the BND….
No doubt that this is an almost perfect inverse relationship.
One detail worth mentioning, longer term bonds are more volatile, both up and down than shorter term i.e. A one year bond will not move near as much as a 30 year. This makes sense because the longer the term, the more payments that are owed and the more change in the prevailing rate effects the bond.
Fast Fast Fast Movement
In true, be careful what you ask for fashion, (we have long been positive towards higher interest rates) rates have moved incredibly fast, especially Mortgage Back Securities which are pools of mortgages used for determining current new rates…
This is the average 30 year fixed rate mortgage…. as of yesterday, this rate was well over 5%…this rate is almost double the rate just a few quarters ago…. With eventual supply, our home asset is facing some headwinds !
Much of this rate movement is coming from Federal Reserve Bank Presidents public comments…..
Why would they do this? To slow the economy… if they can get the market to move rates up, their job is easier ….heck if they can get market participants to do all the work, the Fed would hardly need to do anything… plus markets are much faster to react than the FOMC (Federal Open Market Committee)
Bigger Coupon
Once interest rates move, a new bigger income stream is the net effect… New purchases or re-investments are met with bigger income payments…
This continued higher income payment begins paying back the headwind of the drop in value as shown in the first chart…
Clipping that coupon will be nicer as rates increase!
How Far Can they Go? Rates and the FOMC?
Here comes is the sizzle…. be careful on extrapolating higher rates into the future… this extrapolation has garnered a lot of headlines as of late …. Whoaaaa
This is about a 35 year chart… go back farther, to a much younger demographic, there was a time when the FOMC raised interest rates to the roof… think 15-18% to tamp out inflation….
With an economy today of much more debt to service and older (more savers, less spender) demographics the last four decades have been a slow but continued lower longer term rate….
Note the top of the prior interest rate cycle looks like the top of the FOMC rate hike…again the last four decades….
Stall Speed
With the afore mentioned cycle high repeating as the following cap on rates, looks like, although very fast rate movement recently, the majority of the move is likely over….and therefore less headwind for the value of bonds and bigger coupons….
Lastly… a slowdown in economic times or a rush for the safety of our simple friends usually leads to a reversal in rates and a repeat of the afore mentioned process…but in reverse… lower rates, higher prices!
Have a Great “Bonds and Interest Rate Analysis” Day!
It’s finally done! We are happy to announce we have signed a new lease extending our stay here for about another six years from today! yay
The lengthy signing was certainly not due to knuckles and a negative experience, but more from a conflict of schedules on all parties. After just a few renditions we settled on a happy extension, more costly, but very happy to be in our same location for the next greater than a half a decade.
8222 Douglas Ave # 590 – Home of J.K. Financial, Inc.
Preview of Interest Rate Deep Dive
With some terrific dialogue both here and in the headlines concerning interest rates, we are happy to preview a deep dive on rates next week and a reminder on the ultimate affects interest rates have on asset prices and the economy.
Masters Weekend – Return to Normal?
This weekend, in a more back to the normal Masters Golf Tournament …. we can see one of its all star students who 25 years ago this year made his amazing splash onto the venue. Will be watching, hope you will as well for some wonderful scenic views and back to normal spring sports!
Ahhhhh …. today is a Friday, heading into what looks to be a beautiful weekend here locally, hopefully it’s nice where you are, enjoy your weekend, talk next week!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, please consult your financial advisor prior to investing!
Background
The is the vocal portion of J.K. Financial, Inc. a Dallas Texas Based Fee Only Total Wealth Financial Planning Firm. Founded by John Kvale, a Dallas Texas Fee only Financial Planner and Total Wealth Manager.
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Signs of a less aggressive FOMC/Jerome Powell ? … First time in a long time less happy to see the longest daylight day of the year pass … Summer Friday heading into Fourth of July …
Mid this week FOMC chair Jerome Powell in front of a legislative public speaking event, for the first time mentioned that the FOMC could not decrease oil prices and food prices via faster interest rate hikes.
OK, we may take issue with this slightly because if they beat demand down enough, it will most certainly put headwinds to higher prices of both of these assets. However more importantly, this was possibly the first sign of a less aggressive FOMC, again shared by Jerome Powell.
Instantaneously capital markets took notice of the comments with a much happier tone as did interest rates with an extremely happier tone as well…
Interestingly, and speaking out loud to everyone our thoughts, just two weeks ago, a much harsher tone was voiced by Powell …given that fact, it’s way too soon to say the FOMC has taken their foot off the brake a little bit ….. Heck we still have a lot of economic data to get through for the next few quarters… some of which may be very hot and could have the federal reserve reverse course once again… but maybe it is a start..
We will be watching, but wanted to let you know a possible interesting breadcrumb that occurred this week.
Hot Hot Hot
With an unusually, extremely, hot summer shaping up here in the south, breaking hundred degree days by the week, we wave goodbye to the longest day of the year with less sorrow this year and a bit of trepidation on what August … the seasonally hottest month of the year may bring.
Still better than ice and snow that no one here, present party included, knows how to drive on!
Today is a Friday, getting near Fourth of July midpoint of the year, enjoy your day and your weekend, and if you’re near us, stay hydrated and be careful out there!
John A. Kvale CFA, CFP
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Posted in Debt - Debt Management, Economy, FOMC, General Financial Planning, Interest Rates, Investing/Financial Planning, Market Comments
Tagged FOMC, Interest Rates, Jerome Powell, Less Aggressive FOMC