Bondquake

Dear Ladies and Gentlemen

Many thanks for the feedback to my last weekly. Rising interest rates seem on everyone’s mind. But are the recent bond yield increases really sustainable, and are they even showing a new trend?

Jerome Powell

Yesterday, Federal Reserve Chairman, Jerome Powell, was interviewed during  the “The Wall Street Journal (WSJ) Jobs Summit”. I have included the link to the interview video towards the end of this weekly for your convenience. I think Mr Powell did a fair job explaining the Fed’s mandate and the tools to achieve the mandate’s goals. I had the impression he was well elaborating while being asked by the interviewer on potentially rising interest rates. The interviewer asked more or less the same question from different angles, yet Mr Powell’s answers seemed consistent.

What about inflation

I know there are many, many « prophets » out there, almost longing for higher inflation. For them, Mr Powell’s answers in the interview must have been a blow. As he mentioned, while he would see temporary inflation due to a post-pandemic increase in economic activity and higher energy prices, the Fed’s chairman believes all of this looks more like a one time effect from today’s point of view.
Ladies and Gentlemen, the Federal Reserve is not just a one-person show. It is an institution with thousands of employees, data scientists, economists, mathematicians from the best universities on this planet with access to data, not many can imagine. And yet, and of course, not even the Fed can foresee the future.

However

One of Mr Powell’s statements was very clear. He stated that it is not the Fed’s intention to surprise the market, and I do not see why I should not believe him. However, I understand that forecasts are somewhat tricky to make, even for the Fed.

Bondquake?

Quite frankly, I did not think so before the interview and certainly do not think so now. At least not for the time being. To see interest rates moving up significantly and continuously, we would need to see ongoing consumer price inflation over a more extended period.

Arrogance hitting the Fed – a short comment on the side

Please allow me one last comment. I sometimes seem to sense a certain arrogance from analysts and the (social) media regarding that institution’s work. I can not think much of that. I am convinced the Fed’s employees are trying to fulfil their mandate’s goals as much as they can.

Link to Interview with Fed Chairman Jerome Powell:

Watch Jerome Powell at WSJ Jobs Summit

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.

Many thanks, indeed!

Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth