RAISING RATES TO LOWER RATES!

Raising rates to lower rates. Huh!?

We are not so sure the many understand that the raising of rates could potentially lower rates. Say what?

The fed moves fed funds or the short term rates, the rates banks charge each other for overnight loans. That’s the definition. Of course, also influences consumer borrowing and savings rates. Of course, the illness of Powellitis decided to play God, print up to $9 trillion, take rates to 0%, took over the bond market and created massive inflation. He is the outlier. Notwithstanding that:

Raising rates to lower rates will hopefully occur. Perception matters. If it is the perception of the market that the dude running the fed is on the job in fighting inflation, the more important yields that we tell you to watch all the time could come down.

We think Warsh and the rest recognized the 10 year yield was sitting at 5% while they were sitting at 3.5%. We think they recognized what we recognized and that is the market telling, no, yelling at them to play some catch up. They played some catch up. Yields are down this morning on the long end. It is only one morning but hopefully, it’s a start. In case you don’t know, it is the long end that matters to mortgages and other borrowings. In case you did not know, mortgage rates have gone from low 6 to low 7 in the past year. That’s a lot of cake on a monthly basis.

Raise rates to lower rates. Unfortunately, the President doesn’t understand this so he is already on the attack. Let us be clear. If this fed did what he is demanding and dropped short rates to 1%, first, you are back to screwing savers but most importantly, you want another bout of big inflation? That is exactly how it would come about. Another bout of big inflation will have the bond market worsening and then you want a vicious cycle?

Of course, there are other factors. Oil prices must come down. That will be an outcome on how the war is going. Our two biggest worries are simple. First, the massive debt and deficits with no one in DC caring. Second, past big foreign buyers have been selling. There is a clear lack of trust by others across the globe right now. That also needs to change.

Good job Warsh and the rest. Yes, we are actually complimenting this fed. We’ll stay on watch.