Bond Vigilantes Back on the Job

A couple of days ago, I wrote that the bond vigilantes had woken up but still needed to get fully in line with the Fed’s plan to keep fighting inflation for longer. Today’s news says in two articles they did.

In the first article, we read that bond traders have now priced out all the rate cuts they had added over the past few months, going from an estimated six rate cuts back to three for the year. I think even that may be a bit much, but that projection, at least, matches up with where most Fed FOMC members said they anticipated rate cuts would go in 2024. I takes out the absurdity that had crept into predictions, ignoring what the Fed was saying.

Interestingly, the mainstream press is now saying what I ventured to say back when I heard absolutely no one saying it, which is …

Market-implied expectations for what the Fed will do have been converging toward the median of policy makers’ latest quarterly forecasts made in December. However, even that amount of interest-rate cuts is in doubt, with some investors contemplating the possibility that additional rate increases will be needed.

As I said in my last writing on this subject and in the Goldseek Radio interview I shared, I don’t actually think the Fed will have the courage to increase rates in March; but, if inflation rises more quickly that could give it the courage. We’ll get another crack at inflation tomorrow.

“The air has been taken out of the bubble of over-expectation of rate cuts,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group. “The market right now is fairly priced.”

So, the fantasy pivot has been fully priced out of bonds now.

“My view in a word is ‘Finally!,’” Leah Traub, portfolio manager at Lord Abbett, said. “The market was way too bullish on the timing and amount of Fed cuts coming into the year.”

Noooo kidding! This should be the last nail in the pivot’s coffin.

Says the other article,

What was supposed to be the darling trade of 2024 has unraveled, thanks to the Federal Reserve upending predictions over how fast it would lower interest rates.

Powell finally tapped bond traders on the head strongly enough to change the direction of trade away from the foolishness. Inflation isn’t that easily ended as Powell learned when he was practicing the word “transitory” a lot. The bond market, however, still hasn’t tightened financial conditions back to where they were before bond investors all went to sleep last November. They’re about halfway back to that level, and they need to get yields back up to that level if yields are going to continue to press down on inflation to where the market does the Fed’s work for it, which is why I said I’d give higher odds to a rate hike in March than to a cut. That’s what Powell needs to do to get bond investors to move the rest of the way if he wants to get the inflation fight over: Give them another tap on the head with the handle of his butter knife. Does he have the courage to do that? Probably not unless inflation kicks up more notably in the next reports.

The risk is that the Fed always tightens too long and takes us into a recession, and Powell knows that. I still don’t think inflation or labor is going to let him off the tightening hook until he gets us into full recession, which will unravel a lot more troubles. He’s caught because not finishing off inflation can let it get out of hand so we have to do this all over again. Certainly, what Powell saw in the labor report for January told him he likely needs to tighten harder; but I don’t think the glorious image for labor that sprang upon us in January like a winter heat storm in Texas under the accounting of Biden’s government is going to follow through in the February report.

We may have a little better sense where this is going tomorrow when we see if those monthly rises that have been happening in inflation are going to show up a little more clearly in the headline year-on-year numbers. We should be at the point where they do, but we’ll know soon enough.

Meanwhile, some of your friendly Republican senators have proposed a bill to ban the Fed from creating a CBDC without congressional approval, but they probably won’t find any Democrats to join them nor even get all Republicans on board with that. The bankers have too many politicians in their pockets to slip that one through congress. But, good on those who are trying and who are pointing out how CBDCs will likely be abused.

There is one thing that didn’t happen as the Fed had planned. They said they were going to roll out a new system, which I said was likely the backbone for the eventual CBDC last summer. They did, and it immediately crashed from the load of handling regular bank transactions and doesn’t seem to have been resurrected yet. We haven’t heard much about it for months. Maybe it’s just purring along seamlessly behind the scenes. Has anyone noticed their bank transactions posting immediately in the last few months? Mine seem to be faster … sometimes.