What Does a 3% Fed Funds Rate Mean
Yet another 40 year inflation high. The federal government says 9.1% for consumer prices as of July 13th data, but falling slightly into the mid 8’s for August and September. A new high virtually every month as inflation keeps rising. Look at the recent trend instead of that 9.1% annual number. The last 6 month running rate is 10.4% and the last 3 months run rate is 10.4%. The producer price measure of inflation is at all time highs. This measures what will likely be coming to the consumer in a few months time. It hit 11.3% annual as of June and the last 6 months run rate is now about 11.6%. Faster inflation now and faster inflation coming. So 9.1% may not be the peak of inflation. The Fed barely moved the Fed Funds rate until the summer. It hinted at a 3.00% Fed Funds rate eventually. But now, the 3% rate is here with 6.5%-7.0% mortgage rates. The Fed now plans to go to 4.5% or more. What does a 3% Fed Funds rate mean to borrowers? Hint, housing prices fell last month, the first of MANY drops into 2024 or 2025.
August-The Biden administration and it’s allies introduced more mega spending in excess of $1 trillion. What does a 3% Fed Funds Rate Mean? You can ignore that. Focus now on what does a 5% Fed Funds rate means since the new spending passed. It won’t be pretty for housing. It wont be pretty for mortgage rates. And home prices could begin a steep fall in 2023. Are you ready? Can you protect yourself from foreclosure? Be prepared with a copy of Winning Mortgage, Winning Home from Amazon.
Inflation Causes
Inflation is always and everywhere a monetary phenomenon. It’s always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than in output. Moreover, in the modern era, the important next step is to recognize that today, governments control the quantity of money. So that as a result, inflation in the United States is made in Washington and nowhere else.
If you listen to people in Washington talk, they will tell you that inflation is produced by greedy businessmen or it’s produced by grasping unions or it’s produced by spendthrift consumers, or maybe, it’s those terrible Arab Sheikhs who are producing it. Now, of course, businessmen are greedy. Who of us isn’t? Trade unions are grasping. Who of us isn’t? And there’s no doubt that the consumer is a spendthrift. At least every man knows that about his wife.
But none of them produce inflation for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money.
-MILTON FRIEDMAN
Fed Balance Sheet
Side note: The Fed stated it expected to start reducing the $9 trillion balance sheet it built up. At least $5 trillion of that was to finance recent government overspending and keep mortgage rates low. That resulted in massive inflated housing costs, a runaway stock market, bitcoin and NFT madness as well as other bubbles. Although the Fed said it would start reducing the balance sheet in July, so far it has made reductions in only 1 week out of 4. That $21 billion reduction was a fraction of what it announced and the Fed has since added back about half that amount in new purchases. As a result, the stock market hasn’t yet hit bottom and won’t for a while. Housing price increases have begun flattening, but the drop will be coming when true balance sheet reduction starts. More rate hikes coming. And bitcoin and NFTs? Toast.
May 3 Update –
The Federal Reserve will have to raise interest rates to as much as 5% to ease the hottest inflation in four decades former International Monetary Fund chief economist Kenneth Rogoff said.
The idea that increasing rates to just 2% or 3% will slow price growth “is really unlikely — I think they’re going to have to raise interest rates to 4% or 5% to bring inflation down to 2.5% or 3%,” the Harvard University professor said in an interview on Bloomberg Television. “There’s just a lot of uncertainty. I’m not going to say I know exactly what needs to be done. But it’s clear that things are way out of control.”
What would a 5% Fed Funds rate mean? Perhaps 10% mortgage rates.
March 31 Update – The FOMC increased the Fed Funds rate ¼ of 1% (from 0% to .25%). However, the President of the St. Louis Fed wants to lift the Fed Funds rate not to .25% or 2%, but to 3% more quickly. He also wants the Fed to reduce the $9 trillion in assets (bonds/mortgages) it had previously purchased in order to force down interest rates and prop up federal government spending. Read Winning Mortgage, Winning Home to learn how to take advantage of this environment and protect yourself.
Did the Fed Cause a Recession?
Recession talk has ramped up lately. Did the Fed cause a recession through its incompetent policies over the past two years? Surely if one comes to pass, the Fed bears much of the blame. However, the federal government, Congress and the current administration will share that blame. Wild, uncontrolled spending and grift like rewarding of political patronage with your tax dollars inflamed the inflation hitting not only the US, but the world. One forecasting signal already points to a coming recession.
There is a “bond curve.” This is merely a representation that interest rates are higher for longer term borrowing than shorter borrowing for large borrowers (not ordinary folk though for the most part). Tracking the borrowing rates of the US government creates a graph of rates for periods as short as one month and as long as 30 years. At unusual points in time, normally prior to a recession, some, or all, of the bond curve “inverts.” This means rates for longer term borrowing fall below those of shorter term borrowing. Two of these measures compare the interest rate for 2 year treasuries to 10 year treasuries and for 5 year treasuries to 30 year treasuries.
The 5 year versus 30 year comparison became inverted for the first time since 2006. I think we all remember what followed after 2006 peak mortgage financing. 2008. Here is the historical graph. And late in the day on March 29, the 2 versus 10 year comparison followed its sister by inverting.
U.S. five-year yields climbed nine basis points to 2.63%, rising above those on 30-year bonds. Shorter maturities have been selling off faster than their longer-dated peers this year as investors ratchet up expectations the Fed will hike rates to combat inflation. The spread between five- and 10-year Treasuries inverted earlier this month.
Stock Market 2006-07 versus 2021-22
As noted, the yield curve inverted in 2006 and climbed back to normal only in late 2007. What was the stock market doing at this time? Actually looking a lot like 2021-22. Does that presage a crash? Not necessarily, but it can’t be ruled out. The chart below ends right before the Dow Jones lost another 50% in value with the line literally falling off the chart through the floor.
Fed Chairman Powell Finally Admits The Fed Didn’t Understand What It Was Doing in 2021
Fed Chairman Powell spoke on March 21, 2022 about the Fed’s massive errors leading to current record inflation. One might think the Fed is on the road to fixing the problem it created. However, Powell declared that he expects it will take three years to bring inflation down from record levels to a normal level. “The inflation outlook has deteriorated significantly this year.” “The rise in inflation has been much greater and more persistent than forecasters generally expected.” Unfortunately, the inflation outlook hasn’t deteriorated that significantly this year. It’s been obvious since early 2021 or before. It’s just that the Fed itself put politics above its legal mandated duties and fudged the outlook to match its actions.
Three years. That sounds a lot like 2025 and matches our post from spring/summer 2021 and at the time that the infrastructure funding bill was debated in Congress. It passed the Senate in August 2021 and was signed in November 2021. Our post originally appeared in late summer 2021 and was updated with October, November and December information over time.
And Powell outlined how the experts at the Federal Reserve consistently underestimated the increase in inflation. When the Fed met last June, he said, all the participants predicted that 2021 inflation would be significantly lower than it ultimately turned out to be. And then, when they met in December, they did it again. Given the consistent “expert” errors, perhaps a house cleaning or revamping of the Fed might be in order. But nothing about that appears in the works.
A Lone Dissenter
As the lone dissenter at this week’s FOMC meeting, Fed Governor Bullard said he would like to see the rate boosted above 3%. He pointed out that the Fed moved that aggressively before, in 1994-95 to combat a revving economy and a gradual rise in inflation. “The results were excellent,” Bullard said. “The Committee achieved 2% inflation on average and the U.S. economy boomed during the second half of the 1990s. I think the Committee should try to achieve a similar outcome in the current environment.” “This would quickly adjust the policy rate to a more appropriate level for the current circumstances,” he said.
Actual Inflation:
Lone Dissenter?
Bullard was the only FOMC member to vote against the move. He preferred a larger increase of 0.5 %. He added that the Fed should have already started reducing its nearly $9 trillion in bond holdings. It still hasn’t. In fact, it added more assets in the week of March 21. In his statement Friday March 18, he said inflation is hurting people the Fed is trying to help the most. Everyday workers, not the wealthy working at home, have been harmed the most.
“The burden of excessive inflation is particularly heavy for people with modest incomes and wealth and for those with limited ability to adjust to a rising cost of living,” he said. “The combination of strong real economic performance and unexpectedly high inflation means that the Committee’s policy rate is currently far too low to prudently manage the U.S. macroeconomic situation.”
Not the Lone Dissenter?
Bullard was the lone dissenter in the interest rate vote, opting for a bigger increase. But is he really the only dissenter from the current disaster of a Fed policy? Federal Reserve Governor Christopher Waller said the central bank should consider raising interest rates by a half percentage point at coming meetings. It should also reduce the balance sheet starting prior to July to contain “raging” inflation.
Waller said he would like to “front-load” interest-rate hikes. But he politically decided to support a quarter-point hike even though the data were calling for a half-point rise. As the FOMC continues to play politics, the wallets of citizens shrink at the expense of big investors and the current administration’s attack on wage earners. As the administration just stated in the last week, everyone should buy a $50-75,000 electric vehicle. Pushing gas prices above $9 per gallon was a feature of Biden’s plan and not a bug. Because Climate Change! Perhaps we should all trade in that 5 year old car for a shiny new $75,000+ Tesla.
A Short Aside About Climate Change
Is Climate Change bad? At present every negative story about weather virtually claims climate armageddon and extinction of the earth. Really?
Deaths due to cold weather are 5-10 times greater than due to heat, savings hundreds of thousands of people annually if any warming occurs. Crop yields are up to 40% greater, allowing productive, inexpensive food for the world. Historically, eras such as the dark ages occurred during cold climate variability. The renaissance and other strides were made from the Medieval Warm Period and other warmer natural variability periods. The earth has not warmed even as much as the Medieval Warm Period so far. Should carbon fuel dependence be lowered? If possible. But wind turbines, solar panels and batteries making up the difference is a fantasy not supported by any possible science. Substantial nuclear power additions would be required.
Are there even enough rare earth minerals to build the battery storage needed for the fantasy of net zero carbon? How much strip mining and earth destruction would be required? Vast areas of the earth would become uninhabitable from mining operations. And carbon offsets (paying poorer countries to not build power plants) is a scam moving paper money from one wealthy pocket to another. The whole climate change scam is getting the working class to pay more money to the wealthy and politicians in the government in vote buying while everyday, your costs increase as a tax in one way or another.
Climate Models Stink in Accuracy
Why is there not one climate model that is even halfway accurate? Because that’s where the research government money is. An accurate model is difficult to build, and if built, might stop the flow of government money flowing to “experts” hawking the latest climate alarm. Climate “experts” build ever more alarmist models and publish ever more unsupported papers (think the IPCC from the UN) in order to become wealthy from more government grants. Government grants are not given to any researcher who accurately models climate change or dissents from the government required view. Vast troves of emails show collusion to ostracize anyone disagreeing with alarmist climate scaremongering.
And the claim that global warming causes more natural disasters? Or perhaps the alarmists think hurricanes were lower due to Covid and social distancing?
Real Climate Measurements
Actual measures of warming whether due to CO2 or not has only one definitive source. The only data that are global, reliable and transparent are the tropospheric satellite measurements that are maintained by the University of Alabama Huntsville. The satellite data only go back to 1979, but that is now getting to be a considerable length of time, 42 years.
Science Suppressed
In fact, you will see google, facebook, twitter et al suppress such views that climate change isn’t the bogeyman. Why is there no actual scientific debate allowed from climate experts? Most of those “scientists” signing on to papers about climate change being bad have no background in climate science. They are academics in fields as far away as psychology, women’s studies, and many non-scientific disciplines. A large segment of actual climate change researchers dismiss the alarmist propaganda paid for by Russia and China. Meanwhile, hundreds of billions of dollars are spent worldwide (mainly by Europe and the US only) to create no effect on climate. That money would go a long way to actually creating more equality in incomes, jobs, training, housing, and outcomes.
Dark Money Supporting Net Zero Carbon Environmental Groups
Some of the largest financial support of environmental groups in the US and Europe comes from China and Russia to stoke anti-fossil fuel campaigns. As an example, Germany bought into this, becoming wholly dependent on Russia for energy and decommissioning nuclear power early. Electricity rates and energy rates have tripled and are among the highest in the world as a result. Only recently has Germany found how wrong it was and has announced a total policy reversal. Russia and China are ramping up energy production and coal plants. China has more than 1000 coal plants planned. So no amount of effort by the US and Europe will make one speck of difference in climate change.
What About a 5% Fed Funds Rate?
Larry Summers says the Fed needs to hike the Fed Funds rate to at least 5%. If not, the Fed and US government risk stagflation and recession. In his Op-Ed for the Washington Post, this Democrat economist continues his break from the current thinking of the Federal Reserve and his Democrat party:
- Fed Chairman Powell needs to stop wishful thing and face reality
- The Fed “needs to take far stronger action to support price stability than appears likely”
- The Fed needs to abandon its thinking on inflation, according to Summers.
“I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely,” wrote Summers.
Summers is currently the President Emeritus of Harvard University and previously led President Barack Obama’s National Economic Council. He noted that a recession often follows conditions of high inflation and low unemployment. The Fed is not accepting the problems it has caused by thinking inflation is “transitory.” Inflation at a 40 year high for months and months finally woke up the Fed. A wide range of economists have slammed the Fed for inaction and continuing easy money policies. We have pointed out how the Fed has continued buying securities ( $45 billion in the most recent week alone – March 14th week) even while raising the Fed Funds rate. The Fed has no earthly need buy $1 more of securities and assets. Doing so only continues to exacerbate the problem it faces. But yet it does continue purchases despite saying it ended the buying spree.
A Politicized Federal Reserve
The Federal Reserve politicized its actions in a way not seen in decades in order to support massive government spending. It abandoned its core principles and its requirements set forth in the law for political purposes. While the Federal Reserve must prioritize price stability to sustain employment, it has failed in that regard. Summers said the reality is that real short-term interest rates will have to hit 5% to stave off a recession. Markets currently think this number is “unimaginable.”
“I hope the Fed will make clear that inflation reduction is its principle objective, and that it will wind down efforts to promote worthy but non-monetary goals such as social justice and environmental protection,” wrote Summers. “This implies committing to doing whatever is necessary with interest rates to bring down inflation, including movements of more than a quarter-point at some meetings and a rapid reduction of its balance sheet.”
3% Fed Funds Rate = ???% Mortgage
At the 0% interest rate the Fed maintained in 2020 and 2021, 30 year mortgage rates fell to the lows of around 2.5% to 2.75%. Add 3% and the rate looks more like 5% to 6% for 30 year mortgages. That is only if inflation starts slowing substantially. Which at this point appears unlikely. If inflation remains high, lenders will expect further rate increases. Those expectations would push rates into the 6%-7% rate. If the Fed moves too slowly, inflation will remain stubbornly high and mortgage lenders may might push rates well above the 6%-7% range. A 5% Fed Funds rate implies mortgage rates of at least 7.5-8.5%.
If the Biden administration and Congress passes more stimulus or large programs such as Build Back Better, rates are likely to move closer to 9%-10% due to the upward pressure from excess government spending. You might even see double digit interest rates by 2024.
Home Prices and Mortgages
Home prices would suffer. At a 6% to 7% interest rate, expect a 15% or more drop in home prices. If rates hit double digits, look for a 25% to 35% drop in prices. All eyes should watch the Fed closely as well as overspending by the federal government. This type of overspending would likely lead to wide spread bank failures like, but not as severe as, 2008. Community banks may be hit more than larger banks first due to capital levels and types of lending.
So what does a 3% Fed Funds rate mean? It depends on when you get there. Slow action may breed major negative consequences and lead to a 5% or higher Fed Funds rate later.
The 10 year Treasury sets the general benchmark for mortgages. The chart below shows the jump of more than 1% in the 10 year Treasury in the last 6 months. And the rate moves higher almost every day of Fed antipathy and inaction. The Fed will need to push this rate up in a spike to start heading off inflation and keep the inflation rate under 10% and interest rates from tripling.
