• February 4, 2023

Here’s the problem the Fed is fueling — and it’s not inflation, strategist says

The recent surge in bond yields has finally caught the attention of Federal Reserve policymakers. Governor Lael Brainard said Tuesday that “some of these movements last week and the speed of the movements caught my attention.” Mary Daly, president of the San Francisco Fed, said the central bank could change the duration of its bond purchases – or even, as before, sell shorter-term securities to buy longer-term government bonds in what is known as a “twist”.

Steven Blitz, chief US economist and executive director of global macros at TS Lombard research, says the Fed’s determination to keep rates low through quantitative easing is fueling another problem. Commercial bank lending growth is slowing at a time when the economy is accelerating.

According to the latest weekly Federal Reserve data, commercial bank lending grows about 5% year-over-year as mortgages are carved out that banks don’t keep on their balance sheets. That’s a 10% decrease in April.

The Fed’s holding of government bonds to manage yields isn’t inflationary as the central bank has to hold commercial bank assets, Blitz says. Commercial banks don’t mind that the Fed pays them interest on an essentially risk-free transaction. The Fed now holds 16% of commercial banks’ assets, up from 6% in 2019.

“This exercise is a reminder that the Fed cannot forever protect markets from the cost of funding government bonds that are growing faster than nominal GDP. Right now, the economy is below equilibrium interest rates, but high reserves and capital constraints in a broader sense mean banks cannot fully help others take advantage of the growth from borrowing that those low interest rates would suggest, ”says Blitz.

Far from predicting a surge in inflation, Blitz says the core personal consumption spending measure for prices will only increase 1.3% in the fourth quarter and 1.7% next year. Blitz said the expected $ 1,400 stimulus checks and COVID-19 vaccinations will boost the economy, but at a relatively lukewarm annual rate of 4.5% by the fourth quarter, which will climb to 2.8% next year slowed down.

The buzz

Texas is ending its masked mandate and removing all business restrictions. Ride provider Lyft
LIFT, -0.49%
said it had had its busiest week since March 2020 as it narrowed down its loss estimate.

Rocket cos.
RKT, + 71.19%
will be in the spotlight after the mortgage company’s shares rose 71% on Tuesday, compared to brief pressures that temporarily raised the shares of video game retailer GameStop
GME, -1.84%.

Server and storage provider Hewlett Packard Enterprise Co.
HPE, -0.68%
For the first quarter to the end of January, earnings and sales were reported that were above forecasts.

The Economic Calendar includes the ADP Measurement of Private Sector Payrolls, the ISM Services Report, and the Fed’s Beige Book of Economic Anecdotes.

The market

After the end on Tuesday, US stock futures
ES00, + 0.57%

NQ00, + 0.60%
indicated a stronger start on the Dow industrials
YM00, + 0.65%
200 point contract.

The return on the 10-year treasury
TMUBMUSD10Y, 1.446%
was 1.44%. Bitcoin
BTC.1, + 8.57%
Futures passed the $ 50,000 mark, gold
GC00, -0.66%
Futures fell.

The graphic

Fund manager Columbia Threadneedle has created a return-to-normal index for the US based on a number of measures, such as: B. Traveling, shopping in stores, and eating out. It is not intended to capture economic indicators such as gross domestic product, but rather focuses on measuring components of daily life. The most recent increase was due to the return to personal schooling.

Random readings

Singer-songwriter Dolly Parton converted her “Jolene” track to “Vaccine” when she got the first dose of Moderna
MRNA, -6.73%
She helped finance the COVID-19 vaccination.

Squids, unlike some toddlers, can pass the so-called marshmallow test, with which the self-control is to be measured.

Here’s a deep value for you – A small china bowl bought for $ 35 on a Connecticut sale is up for auction. Broker Sotheby’s says it could fetch as much as $ 500,000.

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