Don't Miss a Fact,
Sign Up for FINfacts!

FINfacts is a weekly newsletter highlighting recent financings and economic insights.

Subscribe Here

Pascale’s Perspective

  • Fed Raises 75 bps And Is Not Done

    Pascale’s Perspective

    September 21, 2022

    Today’s 75 basis point increase in the Fed Funds rate was well telegraphed and the vote was unanimous. Today’s increase to a target rate of 3.00% – 3.25%, the highest since 2008, is the beginning of a period of restrictive monetary policy. The previous rate of 2.25% – 2.50% was considered the “neutral” rate, neither accommodative nor restrictive. The increase wasn’t really news, but the projections for “how much higher?” and “how long?” are significant. The terminal rate (peak) was anticipated to be about 3.8% in June. Today, the Fed dot plot and commentary put that rate at 4.6%. Futures markets are predicting another 75 basis point increase at the next meeting (November 2), with another 50 bps expected in December. That will take it to about 4.3%, on its way to the 4.6% terminal rate. The Fed “dot plot” predictions indicate the rate will remain there throughout 2023 with rate cuts starting in 2024. Compare that to June: a 3.25% year-end rate followed by a few more increases to 3.8% and rate cuts starting in the 2nd half of 2023.

    In his remarks, Fed Chair Powell reiterated his concern that employment metrics are “out of balance” and contributing to inflation in an unprecedented manner. See the chart below, job openings are twice the amount of unemployed people. That ratio used to be about 1:2 pre-pandemic. Labor participation has taken a hit due to unprecedented social and behavioral changes in recent years. It will be difficult to tame inflation as long as this imbalance persists. Therefore, Powell is watching quits and upticks in labor participation very closely.

    The Fed is abandoning its dual mandate, price stability, and full employment, in order to bring inflation under control. Jobs will be sacrificed on the altar of price stability. Quotes from today: “The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer,” and if there was any doubt, “Price stability is the responsibility of the Fed and serves as the bedrock of our economy… We think a failure to restore price stability would mean far greater pain (than higher unemployment)”. Rate increases are quite effective at driving down demand for big-ticket items (houses, cars, etc). The increases so far have put the 30-year fixed rate mortgage at 6.25% (January 1 it was 3.0%) and has contributed to the biggest drop in home sales since 2015. There are other signs that the economy is slowing down – possible “leading indicators” like FedEx’s dramatic drop in volume and dire outlook for next year, California’s drop in projected tax revenues, pauses in hiring from the once soaring tech sector, etc. 30-Day term SOFR is 3.08%, the 10 Year Treasury is at 3.56%, the highest since October 2008. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Hot CPI Report Stokes Fears of “Entrenched” Inflation

    Pascale’s Perspective

    September 14, 2022

    Yesterday’s CPI report was expected to show moderating price increases led by falling energy prices. Instead, the 0.6% monthly increase in core prices took markets by surprise, with stock markets dropping dramatically, erasing recent rallies – which were largely based on softening inflation hopes. Price increases are broad-based – shelter costs, health care, restaurants, and travel are all experiencing high demand from a consumer base that has experienced a 6.7% increase in wages over the past year (that figure is the highest in 40 years). The narrative is changing: falling gas prices, improving supply chains, and lower shipping costs were expected to lead to lower prices. That’s not happening as relentless consumer demand keeps driving prices up. This is hardening expectations that the Fed will have to increase rates higher and longer to accomplish its desire to stifle demand. This was the last major piece of data before next week’s Fed meeting. The futures market is now pricing a 25% chance of a 100 basis point increase in the Fed Funds rate at next week’s meeting. The 10-Year Treasury spiked from 3.29% to as high as 3.46% yesterday, closing at 3.41% today. Piling on: A possible Railroad strike could massively disrupt supply chains as negotiations drag on towards a Friday deadline. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Jobs Report Provides Hopes for “Soft Landing”

    Pascale’s Perspective

    September 8, 2022

    This last week shows how data-dependent markets have become, especially with a highly anticipated Fed meeting approaching. Last Friday’s August jobs report showed a softening in labor demand. This suggested that the labor supply/demand pressures could be slightly easing. Treasuries rallied on Friday in hopes the Fed wouldn’t have to increase rates as much as previously thought. The jury is still out on where the Fed’s “terminal rate” will end up in early/mid-2023. However, Tuesday’s hotter than expected economic reports from the services sector spooked markets as inflationary. The 10 Year yield spiked over 15 basis points up to 3.36% a recent high. Then, today’s Fed Beige Book survey indicated slowing growth and less inflationary pressures. This spurred another rally in treasuries – down to 3.27%. Fed President Lael Brainerd’s comments today were generally hawkish as per the Fed’s recent united message. She used the phrase “for some time” as she gauged how long rates would need to be elevated. But she also provided some hope as she acknowledged the risks of keeping rates high for too long. She indicated that the aggressive stance could “create risks associated with overtightening.” Interestingly, she also implied that the rapid increase in prices over the last 18 months has inflated margins for sellers of goods. She noted that the price consumers pay for cars has risen much faster in the last year than the price dealers pay wholesale. This implies there may be some room for prices to drop in certain sectors.  Futures markets are pricing a 75 bp increase in the September 20-21 meeting. Stay tuned….

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Officials’ Stress Rates Will Be High “For Some Time”

    Pascale’s Perspective

    August 31, 2022

    Stock and bond markets have sold off every day since Fed Chair Powell’s remarks last Friday at the Jackson Hole Economic Policy Symposium. His eight-minute speech mentioned the word inflation over 40 times. Any hopes of the famous, or infamous, “Fed put” being invoked in this cycle were wiped out as he said, “While higher interest rates…will bring down inflation, they will also bring some pain.” He also set markets straight as to the “schedule” of upcoming rate hikes.

    The 75 basis point increase in September is now at 70% likelihood in the futures markets.   Markets expect increases of another 75 basis points total at the November/December meetings.   That would bring the Fed Funds target rate up to 3.75% – 4.25% to open in 2023. That is right where several Fed officials are pegging the “Terminal Rate” – the highest rate hike in this cycle. Markets were assuming that the Fed would then “pivot” relatively quickly with rate cuts in response to a slowing economy. But Powell‘s comment on Friday sought to tamp down those expectations: “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” NY Fed President John Williams chimed in on Tuesday in a live interview: “We’re going to…have restrictive policy for some time…This is not something we’re going to do for a very short period.” He chimed in on the Terminal Rate speculation, saying that “we do need to get real interest rates…above zero.”    “Real interest rate” = the nominal interest rate minus inflation.  Positive real interest rates would mean setting the Fed Funds rate above the inflation rate. Core PCE is at 4.6% today. Assuming inflation drops to about 4.0% early next year, Williams is estimating the terminal rate at about 4.00% – 4.25%. All of this “forward guidance” has therefore upended market expectations of the pace of rate cuts in 2023. This is causing the 10 Year Treasury to increase as it closed today at 3.21%. Of course, everything is data dependent – but officials are stressing that a change in this stated policy will require a sustained and unambiguous downward trend, not just “a few reports.” Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Rise, Stock Markets Drop as Markets Focus on Jackson Hole

    Pascale’s Perspective

    August 24, 2022

    The 10-Year Treasury is up to 3.10%, rising 32 basis points in the last 10 days. Markets are concerned that Friday’s speech by Fed Chair Powell will lay out a more hawkish path than markets expected earlier this month. He is expected to say that a recession will not stop the fight against inflation. The usual assumption is that the Fed will react to a slowing economy by swiftly lowering rates. This is known as the famous “Fed put.” The fear is that Powell may remove that put this Friday. The futures market is now predicting a 60% chance of a 75 basis point increase at the September 21st meeting. Remember, markets have whipsawed back and forth between predicting 50 basis points and 75 basis points multiple times in the last month. The Fed’s recent increases are hammering rate-sensitive sectors, such as housing. The National Board of Realtors said “We are in a housing recession,” as July saw the biggest monthly decline in prices since 2011.  Tightening conditions are also hitting employers, both local and corporate. Large companies, like Oracle, Walmart, Apple, and Ford, have announced layoffs.

    According to the latest PwC survey of US executives and board members, 52% of companies are instituting hiring freezes. Weekly jobless claims rose to an 8 month high this week. The Fed has made it clear that they are abandoning the long-standing “dual mandate” of full employment and price stability (sometimes referred to as the “2 and 4” rule – targeting a 2% inflation rate and a 4% unemployment rate). They now realize that the inflation-curbing “demand shock” that is being implemented must include a cooler job market in order to calm price pressures. Higher unemployment will be seen as “collateral damage” in the pursuit of wage and price stability. Yet, some sectors of the job market are still “hot” with job shortages. Prices continue to rise (albeit at a slower pace). September will see the Fed increase rates into restrictive territory above the “neutral rate” it’s at today (2.50-2.75%).  Now the focus is “what is the terminal rate?” i.e., the peak rate. Powell may address that this week. The futures markets are pricing the peak at about 4.00% – 4.25%, occurring in the second quarter of 2023. The 2 Year Treasury (most sensitive to anticipated Fed increases) is at 3.39%, a 10 week high. This Friday is action-packed with the release of the July PCE index (the Fed’s preferred inflation gauge). The data will be intensely parsed for (hopeful) signs that inflation has peaked and is slowing. After that early morning release, the Powell speech. Stay tuned….

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Minutes Avoid Forward Guidance

    Pascale’s Perspective

    August 17, 2022

    Yesterday’s release of Fed minutes from the July 27th policy meeting reiterated the central bank’s determination to “promote price stability.” Markets were looking for clues regarding the path of the Fed Funds rate over the course of the next few meetings. Whereas the Fed embraced “forward guidance” during the beginning of Fed Chair Powell’s term (circa 2018-2020). Yesterday’s Fed is increasingly data-dependent. The minutes indicate that Fed officials feel that hiking the fed funds rate last month to 2.25% – 2.50% puts the rate at the “neutral” level (neither accommodative nor restrictive). Many participants feel that a “restrictive” level will be appropriate which means more hikes to come (Hawkish).

    Also in the minutes: “as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation” (Dovish). The futures market is now predicting a 66% chance of a 50 basis point hike at the September meeting. There is no meeting this month. The Fed also is concerned about its public image: “a significant risk…is that elevated inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently.” This speaks to consumer and employee behavior and expectations being a critical component of wage and price stability. Interestingly, yesterday’s derivatives markets predict that inflation will be approximately 3.3% over the next 12 months. Interestingly, the market prediction last August was also 3.3%. How did that turn out? The 10 Year Treasury has traded in a tight range this week between 2.77% and 2.90%, settling yesterday at 2.87%. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Slightly Cooler” CPI Report Sparks Market Rally, Treasury Yields End Flat on the Day

    Pascale’s Perspective

    August 10, 2022

    The July CPI report indicated an 8.5% annual inflation rate, and flat for monthly inflation rate. Gasoline led the decline with a 7.7% drop monthly, but that was offset by increases in food (1.1%) and shelter (0.5%). These numbers were softer than estimates. Markets rallied accordingly on hopes that inflation had peaked. Markets also cheered Monday’s inflation expectations survey from the NY Fed: the median expectation of inflation over the next 3 years dropped to 3.2%. Down from 3.6% last month, and 3.9% in May. That is critical as consumers’ expectations of rising prices can become a self-fulfilling prophecy. The 10-Year Treasury dropped to 2.70% this morning and then settled back up to about 2.78%. Today’s auction of 10-Year Treasurys saw the highest demand in 6 months, a good sign. As far as inflation peaking, it will take multiple months of trending for the Fed to be comfortable that their rate increases have been effective (remember the Fed target is 2.0% annual inflation). Futures markets are already pricing in less hawkish Fed behavior: the futures market shifted from predicting a 75 point increase at the next meeting to a 50 point increase. Tomorrow’s PPI report will be closely watched along with Fed President Mary Daly’s speech. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Strong Economic Data Contradicts Recession Narrative as Yield Curve Inversion Hits 22 Year High

    Pascale’s Perspective

    August 3, 2022

    Monday opened with yields plummeting on a “flight to quality” as geo-political tensions rose due to the “flight to Taipei” by a US Congressional delegation. Worries dissipated on Tuesday as the focus shifted back to economic data and remarks from Fed officials. Today’s ISM numbers indicate strong demand for services. Factory orders rose in June with surprising demand. Markets may have been expecting recessionary pressures to create demand slack and cool inflation, thereby avoiding predicted interest rate hikes.

    Fed officials chimed in as Fed President Bullard said the central bank “has a long way to go” to get back to the 2% inflation target. Fed President Mary Daly then started the September speculation game by saying a 50 basis point hike next month would be “reasonable.” Fed Futures rates softened immediately to a 57% probability of a 50 basis point increase. The markets favored a 75 basis point increase the night before. The 10-Year Treasury dropped to 2.51% Monday, jumped to 2.85% today, and now is at 2.71%. The 38 basis point inversion between the 2-Year Treasury and the 10-Year Treasury went to 40 basis points. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Powell Puts It in Neutral, What’s Next?

    Pascale’s Perspective

    July 27, 2022

    Today’s 75 basis point increase in the Fed Funds rate was expected as it was “telegraphed” in advance by Fed officials. Coming on the heels of June’s 75 basis point increase, the Fed Funds rate is now 2.25-2.50%. This is the Fed’s targeted “neutral” rate that is neither restrictive nor accommodative. Goldilocks is sipping her porridge. The rate is right back to the post Financial Crisis high as set by newly approved Fed Chair Powell in December 2018. The 10-Year Treasury in December 2018 was hovering around 2.75%, just like today.

    Where are we and where are we going? Powell insisted we are not in a recession. “Recent indicators of spending and production have softened,” is his preferred terminology. What about the September meeting and the rest of the year? Markets rallied on perceived Fed dovishness going forward. Nasdaq saw its biggest one-day increase since 2020. He remarked that slowing down from the pace of 75 basis point rate hikes will be appropriate “at some point,” and the Fed is now in a “meeting to meeting” phase; and that it “likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.” The year-end target and possible “peak” is estimated at 3.25-3.50% – a full 100 bps into “restrictive” territory. Will that cause a recession? Again, Powell chose his words carefully, “This process is likely to involve a period of below-trend economic growth and some softening in labor market conditions, but such outcomes are likely necessary to restore price stability.” The 10-Year Treasury barely moved, closing at 2.76% as the yield curve flattened out (but is still slightly inverted). One-Month SOFR is 2.32%, Prime Rate is 5.75% as fixed and floating rates diverge. Now, time to watch the data – tomorrow: GDP, Friday: PCE, and employment report next Friday. Stay tuned..

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Signals a 75 Basis Point Increase, Treasuries Remain “Range Bound”

    Pascale’s Perspective

    July 20, 2022

    Last week’s market consensus that the Fed would increase rates by 100 basis points at next week’s meeting has ebbed. Multiple Fed officials spoke last Friday, just before the traditional pre-meeting “quiet period” where they refrain from public comment. Each one indicated a 75 basis point increase was appropriate, clearly telegraphing their intent. Some officials feel that a big increase could damage the strong labor market. I guess that means that a 75 basis hike next week is “dovish”? With little economic data this week, treasuries are trading in a tight range. The 10-Year Treasury has been fluctuating between 2.90% – 3.10%, closing today at 3.02%. The yield curve inversion is holding with the 2-Year closing 21 basis points above the 10-Year.

    Next week will provide much more direction as it is “action-packed” with: Consumer Confidence on Tuesday, Fed meeting and statement on Wednesday, Q2 GDP on Thursday, and the all-important PCE report on Friday (the Fed’s preferred inflation gauge). The GDP report may show that we are in a recession now (defined as 2 consecutive quarters of negative GDP). Stay tuned….

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Hot” CPI Report Triggers Expectations of 100 Basis Point Fed Increase, Biggest Yield Curve Inversion Since 2000

    Pascale’s Perspective

    July 13, 2022

    Fed Chair Powell has made it clear in recent statements – the Fed’s inflation response will continue to be driven by “the data.” Today’s release of the June CPI report indicated stubborn price increases across a wide spectrum of goods and services. The “headline” number of 9.1% is the highest annual gain since November 1981, expectations were 8.8%. Core CPI (excluding food and energy) rose 5.9% (5.7% was expected) and the highly watched core monthly increase was 0.7% (0.5% was expected). Key categories were up sharply over the last month: food (1.0%), energy (7.5%), gasoline (11.2%), apparel (0.8%), household furnishings (0.4%). There was some speculation that non-food retail goods like clothing and appliances would see price decreases as many retailers indicated they are overstocked, so these increases are indicators of broad-based inflation pressure. The Fed is now expected to increase rates by 100 basis points at the July 27th meeting. Futures markets show a 78% probability tonight, yesterday it was about 10%. A full point increase would be the largest since Fed Chair Greenspan fought inflation in the summer of 1988. The increase would put the Fed Funds’ rate (and 30-Day SOFR) up to 2.50% by the end of the month. The September futures indicate a 70% chance of another 75 bps up to 3.25% after the September 21st Fed meeting (there is no August meeting).

    The bond market sold off on the short end and rallied on the long end, inverting the yield curve farther than any time since 2000. The 10-Year started the day spiking up to about 3.07%, before dropping to 2.91%. The 2-Year jumped to 3.16%; a 25 bp inversion between long and short. The Fed is pushing to avoid inflation expectations to become entrenched and alter consumer, employee, and employer behavior. The fear is that workers who are expecting price increases to continue will negotiate higher wage increases. That will then put pressure on companies to raise prices in an “inflation feedback loop.” Markets seem “resigned” to the Fed’s harsh medicine likely triggering a recession. Note that the Atlanta Fed’s “GDP now” index indicates that a recession is happening now. It predicts a negative GDP for Q2 (the actual GDP estimate comes out on July 28). The hope is that inflation peaks soon and a short recession will be the perfect excuse to cut rates in early 2023. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Rally on Fed Minutes as Bond Yields Rise, June Jobs Report Looms

    Today’s release of the Fed meeting minutes for June indicated that there is an agreement for another 50 – 75 basis point increase this month (after June’s 75 basis point increase). The officials also indicated that an “even more restrictive stance could be appropriate if elevated inflation…persists.” Another 75 basis point increase would put the Fed Funds rate at 2.25% -2.50%, right at the Fed’s “neutral” rate. So, further increases after July would put it officially in “restrictive” territory. Another takeaway from today is the Fed feels the battle is shifting to one of “messaging”. Expectations of future inflation are becoming prevalent for the first time in decades. Fed officials worry that this expectation can result in more entrenched inflation. The notes also show that Fed officials believe that their constant messaging on their willingness to tame price increases is critical in reassuring consumers. The bright side? Officials note that by raising rates quickly today, they will have more flexibility later to pause or slow down in the fourth quarter and early next year. This Friday’s release of the June employment report will be closely watched – especially the hourly earnings increase and participation rate. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners