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Mester Says ‘Rates Need to Be Higher’

I am confused that on a continuous basis Fed folks claim to be data dependent yet when the ‘have the stage’ they say rates need to be higher (or lower) – are they data dependent or not? Yesterday Cleveland Fed President Mester said rates need to go above 5% and stay there for some time–I guess she has a super crystal ball and knows future data better than anyone else. Oh well these folks have shot their mouths off for years and they aren’t likely to stop anytime soon–all I can say is ‘we’ll see’.

How about the 10 year treasury yield–off 10 basis points today to be trading around 3.32% – down 17 basis points from last Fridays close. Of course we are in a period of time where preferreds and baby bonds don’t move in lockstep with interest rates–over time they will, but we have too many other influences that are driving prices up and down.

The ADP jobs numbers were soft today coming in at 145,000 new jobs created in March versus 261,000 forecast. Does any one really care? Not me because these numbers have had little correlation with the ‘official’ jobs numbers (which come out on Friday) – not sure why these still make the news each month – guess CNBC has to fill air time.

I don’t plan to do a thing today–as far as buying or selling, mainly because I need to head out the office soon and won’t be back until markets close–but my GTC orders will be there for anyone who wants to sell me some shares at a wholesale price.

14 thoughts on “Mester Says ‘Rates Need to Be Higher’”

  1. I’m fairly heavily positioned in financials (about 40%). Should I sell now and switch over to other sectors?

    1. That’s a fairly heavy weight to a volatile sector. I guess it depends on whether you’re a trader or investor, and what the quality of your holdings are. We’ve had 2-year yields fall over 100 bps in just a month. That’s a historically fast drop, taking profits might be warranted.

  2. The Fed still thinks of itself as relevant. They might be, just look at the overreaction to everything they say or do. But the truth is, the Bond market runs the whole damn show. The Fed is totally misreading the inflation problem. They are the cat chasing the laser. Not saying money should be free, or even close to being free, but their language and actions are going to kill the market, and Main Street along with it, for years.

  3. Inflation is not under control. Something is broken, and it is called inflation. Bond ‘gurus’ have called for a pivot for a long time. The rates are increasing, and need to. This is a pause in returning to more normal interest costs. Free money has caused a lot of damage.
    Thanks for this place. I learn plenty.

    1. I still think that the Fed is looking at this all wrong.

      They can influence demand for money by raising/lowering rates. In the current setting, they think that by raising rates, business will want to borrow less and inflation will fall – then all will be well. That “demand side” influence the only real “hammer” they have.

      I believe that what we are experiencing is not a demand problem, but rather a supply problem. The US government is simply pouring WAY more (borrowed) money into the system than it can handle and that is what is driving inflation.

      Unfortunately, because the Fed only has one hammer, they view every problem as a “demand side” nail, and they continue to raise rates. I think that we are seeing some modest short term decrease in inflation as business pulls back from higher rates (the hammer works, a little), but underlying inflation will continue to plague us because the Fed’s actions won’t do anything to address the underlying tidal wave of (borrowed) cash that the government is still driving.

      My biggest concern is that by reducing businesses demand for cash, the Fed will hamstring the one part of the economy that can help absorb at least some of the excess supply of cash, and we will fall into recession while still suffering inflation.

      Just my thought. Not a thing we can do about it.

      1. “The US government is simply pouring WAY more (borrowed) money into the system than it can handle and that is what is driving inflation.”

        If one researches history this is exactly what the core problem is. The classic case of unintended consequences from actions taken by the federal govt with citizens who either don’t care, don’t understand, or feel helpless to change it. States on the other hand are a mixed bag.

        To me this all feels very socialistic in nature. The more you give out in those types of programs, the more consumption demand, and less productivity. Govt officials and people getting payments from the federal govt produce very little.

        Soon we shall see more people crying for nationalization of certain sectors as the solution. As well as price controls. (CA and insulin for example).

        And then we shall see national socialism which.. ahem… should ring a bell with a certain leader/country.

    2. Doug,
      “Inflation is not under control”
      Are you sure ? They assured us it was transitory 🙂

  4. The Fed is approaching a non-linear problem with a very linear diagnosis. Therefore, its probably they always just wait for things to break first because managing more than one variable to them is beyond their skills of the 400 PhDs at the Fed.

    Usually the 2 yr and 10 yr treasury yields are good guides of where things are going.

  5. The Fed has always maintained that the PCE is the most accurate measure of inflation. The year-over-year PCE is now 4.6%. and it trending downwards. The current fed’s fund rate is 4.75% – 5.0%. So, by the Fed’s own preferred measure of inflation – interest rates are above the inflation rate. What’s the justification that Mester has? Let’s use the less accurate CPI or PPI inflation data.

    My point is they can always “cherry-pick” data. They should pause and keep interest rates where they are until inflation begins to fall further.

  6. I think the Fed will break something (Financials) or we drop into a deep recession, and then the Feds will pause rates and depending on the severity of the economy, they will bring rates down rapidly. Historically unemployment does not fall until after the recession hits.

  7. I thought Powell was pretty clear with the 25 point increase in March. He implied that the Fed thought that an increase of 50 was warranted by the economic data but that the possibility that the bank deposit/accrued portfolio loss scare might impair the economy warranted stretching the rate increases out longer. So the Fed is leaning into further rate hikes unless signs of financial instability increase.

    I am still a mere “grasshopper” but I wouldn’t expect a pause before an increase in the unemployment rate or a couple of banks fold.

  8. I liked the days when we didn’t hear from a Fed official every other day and they shared one message.

    1. Me too. They all sing the same song every time
      🎵 We have more work to do 🎼🎼
      So go do it and shut up.

  9. Headline from January 11, 2023, well before the bank crisis: “Trust the Bond Market, Not the Fed, on Interest Rates, Gundlach Says.”

    “Right now there’s a gap between where the bond market says interest rates are heading, and where Federal Reserve officials say they’re going—and the so-called bond king says investors should put their faith in markets. “My 40 plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says,” said Jeffrey Gundlach, (of) DoubleLine Capital…..”

    I agree with Gundlach’s thinking. Mester may be right in theory: higher rates longer are needed to control inflation. But that’s not all there is. I don’t think the Fed is seeing a recession in its crystal ball. On the other hand, I think the Market is fearing a credit contraction from massive deposit outflows and deflated bank asset values and sees a need for interest rates well below the 5 handle to right the ship. Just look at current rates versus a month ago.

    Just my opinion.


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