Fed, Fed, Fed, Fed, Fed…..everyone has something to say about the Fed. Whether it’s coming from the inside of the Fed, billionaire investors, or the guru of all things interest rates, the hits and misunderstandings seem to come from every direction. It’s always notable when a Fed President speaks publicly, so when Fed President Raphael Bostic said “We won’t be thinking about rate cuts until well into 2024” it resonated with us. The Fed has not been unclear regarding this point. A likely pause aside, Chairman Powell has been very clear that he is fighting inflation first and that the target is 2%. We’re NOWHERE NEAR THERE, so at the very least, we should expect a plateau in rates until we start seeing bigger declines. It’s been a bit unnerving looking at the derivatives market and seeing an expectation for rate cuts in the back half of 2023 when it has been very clear to us what the Fed’s intentions are. That said, in case the commentary by Mr. Bostic is misunderstood as super bearish, billionaire investor John Tudor Jones seemed to have brought a lighter tone to CNBC when he suggested that there may not by cuts, but there also won’t be a further increase in rates. The comments from both of these gentlemen seem to jive well with each other and at least allow for the possibility of improvements in asset values.
As impressive as the Atlanta Fed President and the Mr. Tudor Jones are, recent commentary made by Jim Grant of Grant’s Interest Rate Observer both cut the deepest and should give us all pause. He said, “the Fed is problem No. 1 in American finance”. Is he right? The distortions made in the market based on artificial moves in interest rates certainly made things feel better more quickly as the pandemic proceeded. They also helped after the GFC. But should they have? This is clearly a matter of taste and intestinal fortitude, but if the Fed had not intervened after the GFC, things would have gotten much worse. But on the flip side, maybe we wouldn’t have massive inflation or a banking crisis we have today if they had been more laisse-faire with rates at a previous date. The issue we are ultimately most concerned with is that the Fed has been suppressing long term interest rates by buying long dated bonds since Bernanke was Chairman. The subsequent run up in asset values will be very difficult and painful to unwind. The market has become addicted and we’re already starting to see signs of withdrawal.
Sources: CNBC, Marketwatch, CNBC