Here’s What You Need to Know About the Fed’s Rate Hike
Here’s What You Need to Know About the Fed’s Rate Hike by Bill Bonner – Bonner and Partners
LONDON – “Nothing but bad news in the paper,” a colleague saves us the trouble of reading it ourselves.
“A building caught fire here in London. Dozens dead. A guy opened fire on Republicans at a baseball field. He shot a few of them. The Fed raised rates.”
The only one of those things on our beat is the last one.
The Reflation Trade Is a Flop
We are on record: The Fed will never raise rates in any serious way. Nor will it ever willingly “normalize” its balance sheet.
So what’s going on?
Our friend may have missed the most interesting news. Among the flotsam and jetsam in the press floated a few items worth scooping out of the water and examining more closely.
For one thing, inflation is coming in below the Fed’s 2% target. In fact, the latest numbers are lower than those when Donald Trump was elected.
Inflation expectations, as measured by the bond market’s “breakeven rate,” have been going generally downward for the last 35 years. Last year, the trend seemed to come to an end when yields and inflation both bottomed out before Trump’s election.
Since then, they’ve headed down again.
Currently, the market is predicting an inflation rate of just 1.72% over the next 10 years. Which means three things…
First, so far, the “reflation trade” has turned out to be a flop. Instead of going up, inflation has gone down.
Second, it also means that instead of heating up… the economy has cooled off.
And third, the “real” interest rate, even after another rate increase from the Fed, is still negative.
…which makes you wonder. How come stocks are still near an all-time high so late in the economic cycle?
Expansions don’t go on forever. They need to take a rest from time to time. We don’t know when the next recession will show up, but we know this: It is getting closer every day.