We’re Not Even Thinking About Thinking About Raising Rates

These emphatic words from Fed Chair Powell today along with a “dot plot” showing no rate increases until after 2022 indicate the level of commitment from the central bank to stabilize the economy. This will create an unprecedented extended era of near zero rates that span from December 2008 and continue until 2023, with the exception of Dec 2015 to March 2020. Between the zero rates, trillion dollar annual deficit spending, and the explosion in the money supply, the fact that these measures aren’t spurring inflation or higher borrowing costs is astounding and goes against all 20th century economic theory. Last week’s blockbuster positive employment report was encouraging and briefly led to a spike in Treasury yields. Powell noted it as a single data point and reminded us that we have a long way to go. The Fed predicted an economic contraction this year of 5 to 10% and unemployment at year end of 9%. Last Friday’s Treasury yield increase was a product of the bullish jobs report and some uncertainty about the Fed’s rate of treasury purchases. Note that the Fed was purchasing over $300 billion per day (!) during the panic week of March 24-27, and then slowed to as low as $2-3 billion per day. Today they announced that bond buying will continue at the rate of $80 billion per month of Treasuries and $40 billion of MBS. Ex Fed President William Dudley predicts these measures will expand the Fed’s balance sheet to over $10 Trillion (remember that the “normal” balance sheet level for the Fed, pre-2008 was considered to be just under $1 Trillion). These assurances brought the 10 year T down to 0.74%. The calls within the Fed to institute “yield curve control” are growing stronger, but for the shorter maturities. The thought is that the longer end of the curve is more difficult to control and there is some hazard in trying to control the 10 and 30 year maturities. With risk spreads tightening and lenders picking and choosing “winners” among the product types and markets (no hotel, yes multifamily, etc.), borrowers can lock in historically low rates. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners