The Fed Must Be Getting Fed-up with an Endless Road to More Inflation

There is just too much to cover in today’s news to do it all, so I’m saving the fascinating stuff from this week’s odd convergence of solar/lunar/lunacy events for my weekend Deeper Dive, which I am thinking of calling “The Apoceclipse: We Survived!” (Of course, maybe by then we’ll know we didn’t, or those who sift through our remains 10,000 years from now when they land here will know we didn’t and will put this planet on their list of sites to see … like Pompei is on our lists.)

The whirlwind tour of the eclipsing of America will take too long to put together for a weekday editorial, so such jubilee, madness and mayhem will have to wait in line behind more mundane madness like the Federal Reserve where my unknown predictions are doing a lot better (so far) than the renowned ecliptic predictions of many Sunday-morning eschatologists. Still, the day is not over, and the New Madrid Fault waited four months after the solar eclipse of 1811 to shatter several times into a series of the nation’s largest earthquakes on record, clanging church bells from Tennessee to Tallahassee and up to Boston. So those predictions of an earthquake calamity related to today’s solar eclipse because it passed over New Madrid already have a hedge built into their timelines.

Mine for the Fed have none. I try not to hedge my predictions. The first date was clear: The Fed wasn’t ever going to pivot in March, period; and June, which I said would prove to be too ambitious of a hope, too, is rapidly moving off everyone’s radar screen. On Friday, I wrote about how Fed heads were pushing the date away from June, and today we have more articles about that. So, I’ll stay with predicting the easier stuff the Fed stuffs down our throats with its policies and stay with following through on that for today.

Treasuries yields and cost of government debt keep climbing

The top article in my news section talks about how Treasury yields keep surging upward as the Treasury market now does a huge Fed rethink. Gee, ya think? It should have stayed with its thinking of last October and never jumped onto the bandwagon filled with pivotheads, but the whole of both stock and bond markets turned pivothead. Now we read:

Treasury Yields at Year’s Highs Draw Buyers Despite Fed Rethink

Treasury yields reached their highest levels of the year Monday — where they swiftly attracted buyers — as traders decided two Federal Reserve interest-rate cuts are likelier than three this year.

And that will prove too ambitious, too, but denial about inflation and what the Fed needs to do to kill it dies hard. Still, views are now decidedly starting to recognize what should have been obvious all along:

Loss of faith that the Fed will deliver on the three quarter-point rate cuts that policy makers last month said they expected began gathering pace on Friday in response to strong March employment data.

But, alas, it still doesn’t go far enough, as plenty of denial continues to hold out:

While the new view prompted investors to demand higher rates of return on Treasury notes and bonds — pushing the benchmark 10-year note’s above 4.45% for the first time since November — the enduring expectation even for a smaller amount of Fed easing continues to benefit the market….

Strong demand for 10-year Treasuries is anticipated if the yield tops 4.5%, also for the first time since November. Yields across the maturity spectrum climbed to fresh 2024 highs, including the two-year for the first time since March.

And that demand, of course, will start up the old stock-bond money pump I’ve talked about. The money that wants to go into Treasuries to find more attractive, safer yields has to come from somewhere, and much of it will come stocks because those seeking safe returns are already flocking to gold, so it won’t likely come out of precious metals. Gold will likely get more money from stocks and so will bonds … as well as out of more traditional savings vehicles. (Plenty on gold also in the for subscribers, I won’t cover it in this editorial.)

More sensitive than longer-maturity debt to changes in the Fed’s rate, two-year Treasury yields rose to 4.79%, the highest level since Nov. 28. Among the shifts in expectations based on March employment data, economists at JPMorgan Chase & Co., while still expecting three cuts this year, predicted the first one in July rather than June.

Well, they can keep pushing that off further than July, too.

Rate cuts are a receding mirage

Fed officials have pushed back against the need for easing, with some even stressing a risk of hikes should progress on inflation stall.

It clearly has stalled. As I’ve shown in graphs, the Fed has made no headway on inflation, going all the way back to last June/July.

At the start of the year, expectations were widespread that the Fed’s 11 rate increases in the past two years would not only curb inflation but also cause economic stress, leading the market to bet on as many as six cuts this year. Instead, progress toward lower inflation has slowed, growth metrics have remained robust, and investors continue to shovel money into stocks and corporate bonds at a pace that suggests the economy doesn’t yet require lower rates.

But also at a rate that assures inflation will keep rising until the Fed fights harder, which eventually will break the economy and markets in order to get inflation back under control.

Another article today warns that the Fed dare not get it wrong again and says economists are increasingly uncertain there will be any rate cuts this year. So, the economists are catching up to us, Folks.

Some economists say recent data has pushed a summer cut completely off the table.

Friday’s jobs report reiterated the seemingly unwavering strength of the U.S. labor market and suggested further need for Fed caution. All eyes will now be on Wednesday’s consumer price index, after February’s annual inflation rate of 3.2% came in slightly higher than expected.

It comes as a growing number of market participants have raised the possibility of no rate cuts at all this year….

George Lagarias, chief economist at Mazars, told CNBC on Monday that rate cuts in the summer were now looking much less likely.

“Personally, I wouldn’t be surprised if we saw less rate cuts and pushed more towards the end of the year…. The Fed will struggle to find the case to cut rates soon.”

Labor isn’t letting up

As I’ve said all along, the Fed’s broken labor gauge is not going to give them the reading they need in order to back off on raised interest rates. And here we have a little ahem”:

“The Fed has been punishing itself ever since 2021 when ‘team transitory’ ostensibly got it wrong. ... What they feel is that they can’t get it wrong again, which means that they’re more likely to err on the side of caution,” Lagarias added.

They clearly know they lost face on that fatal error, and unemployment is giving them no reason to say they need to start cutting interest. Unfortunately, what they still don’t understand (because almost nobody does) is that their labor gauge is broken. Labor is tight because labor is broken, not because demand for labor is so strong. So, it has little to do with economic strength, but the Fed doesn’t get that, so the tight labor situation will keep it holding interest rates up, thinking it has more leeway before breaking the economy than it really does. There just aren’t as many people as there used to be who want to work. And almost all of the net new jobs have been part-time jobs.

They do not want to be the Fed that cut rates as inflation kept beating expectations. So they want to see more data toward the right direction and they are willing to wait.”

Exactly. Thus …

Speculation that there could be no interest rate reductions this year has been growing.

Getting all oiled up

Further pressuring the Fed are the inputs to inflation that keep raising the heat. With oil having just busted last week past the $90/bbl barrier that I said it would break through soon, we now have some major voices in oil pricing saying this week that it is likely to break through $100/bbl this summer as well. I see nothing, as the article on that topic points out, that will stop it. At least very little that would stop with plenty that will accelerate it to that level and even beyond.

The odds of oil rising to $100 due to present and easily foreseeable supply shocks, says one article, are quite high while another article says their outfit see tightness in the oil market getting even tighter through the summer. The multiple wars are, of course, one factor listed, as are supply shocks due to shipping that are intensifying speculation of commodities-driven inflation like we saw in the 70s and 80s. Mexico is slashing its oil exports to help its domestic market. America may target Venezuela with more sanctions as it has Russia. And who knows what a possible war with Iran v. Israel and the US will do? OPEC is sticking to its guns, too.

It all adds up to a magnitude of supply disruption that has taken traders by surprise. The crunch is turbocharging an oil rally ahead of the US summer driving season, threatening to push Brent crude, the global benchmark, to $100 for the first time in almost two years. That’s amplifying the inflation concerns that are clouding US President Joe Biden’s reelection chances and complicating central banks’ rate-cut deliberations.

So, it looks like oil prices will be holding up in the manner that I said, if it happens, will raise the price of just about everything. Everything here is staying on the trajectory of the trends projected in The Daily Doom.

It is not too late today to catch the Anniversary Sale on Daily Doom subscriptions.