One of the things I’ve been vocal about is the Fed’s inability to be able to sustain interest rates, and their backing off from the current “tightening regime.” Yes, I put tightening in quotes because the Fed is not really tightening monetary policy, as monetary is already tight. The inability of the Fed to sustain rate hikes has many factors. Some of the factors are the lack of YoY increase in the volume of credit issuance, the Fisher Effect, what swap spreads are telling us, and lastly what the cross-currency basis swap market is telling us currently about the inability of banks to have access to the wholesale dollar funding market. All of these things will play a role in my thesis on why the Fed is not able to raise interest rates.
Though I agree with you that the Fed will eventually back down, but the biggest question is when. Last time, they raised rates to 2.5% before starting another QE. This time they are "targeting" a neutral rate, which is around 2.5-3% as of now.
Will a "crisis" in European bonds or a currency crisis in Asia lead them to back off? The USD shortage and the weakness in the yen and euro have huge implications for weaker economies with low forex. The crisis this time will be elsewhere for sure, but the response of the Fed will be keenly watched (another QE or just a halt of QT and hiking rates).
intersting. thanks for posting
Great Explanation!
Though I agree with you that the Fed will eventually back down, but the biggest question is when. Last time, they raised rates to 2.5% before starting another QE. This time they are "targeting" a neutral rate, which is around 2.5-3% as of now.
Will a "crisis" in European bonds or a currency crisis in Asia lead them to back off? The USD shortage and the weakness in the yen and euro have huge implications for weaker economies with low forex. The crisis this time will be elsewhere for sure, but the response of the Fed will be keenly watched (another QE or just a halt of QT and hiking rates).