Fed Up to 5.50%?

It’s a done deal, but is the Fed done? [The Rude Awakening] July 26, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Fed Up to 5.50%? - It’s pretty much a done deal that the FOMC will raise rates to 5.25% - 5.50%. - But is the Fed done after that? - It looks like we’ve got at least one more hike in store. But will there be more? [New Biden Bucks Follow-Up Available Now]( Hey, it’s Jim Rickards. Since posting my original Biden Bucks presentation online, millions of people have viewed it. Snopes and the Associated Press have even attempted to “fact check” me and claim my warnings are false: [Click here to learn more]( Point being, my message has raised a storm and caused a lot of controversy. But in the time between my message and now, a lot of new developments have come to light. That’s why I’ve just released an update to my original prediction… one which will likely be even more controversial. [>> Click here now to access my new 2023 Biden Bucks follow-up](. [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning from bright, sunny Northern Italy! Since my in-laws are in town, we’re showing them around. Today, my father-in-law saw Micah’s school, where they’re holding his mini-summer camp. Then, I took him to Fabrizio’s, so he could see where the finest coffee in Asti is brewed. It’s nice to have family in town. We’ve been alone for so long, we forgot what it feels like. It sure taught us not to talk anything for granted. But if there’s one thing you can take for granted, it’s that the Fed will hike another 25 bps today. You may remember me writing about “the skip” last month when the Fed chose not to hike rates. I thought it was stupid then. Now I think it was indeed wholly pointless. But never mind. We’re back on the hiking cycle. But is this the last hike? Will the Fed go again in September? And what should the rate be? Let’s explore these questions in today’s Rude. Today You may wonder why I write about Jay Powell so intermittently now. First and foremost is that Federal Open Market Committee (FOMC) meetings are eight weeks apart. The FOMC is the “Gang of 12” that determines the Fed Funds Target Range. Today is the conclusion of their two-day meeting. The next meeting is September 19-20. This year's final two meetings are Oct 30-31 and December 12-13. Second, we know what Chairman Pow intends to do and how many more times he can do it this year. As for today, it’s a done deal. Barring any 6-sigma or Black Swan event between now and the announcement, the Fed will hike rates to a target band of 5.25% - 5.50% from 5.00% - 5.25%. [SJN] Credit: [CME FedWatch Tool]( How will the market react to the hike? I imagine any move in the markets today will only have to do with market stuff, not Fed stuff, unless… … Powell blows the press conference. And that’s something he’s done before. If Powell comes out swinging and says the hiking cycle isn’t done and we have much more to go, the market may fall. But honestly, I don’t see that happening. What about going forward? [CURRENCY WARS ALERT]( With Putin invading Ukraine…Rising tensions with China… Inflation, recession, supply chain issues, and the potential for greater violence is breaking out all over the world. It seems as if some of my worst fears have finally come true. [That’s why I’ve recorded this message from Pentagon City.]( To tell you exactly what you need to do to prepare for what comes next. Because if history is any indicator, soon…and I mean very soon… This war is not going to end well. [Click here to view my urgent message from Pentagon City.]( [Click Here To Learn More]( Tomorrow Many economists, including Ben Bernanke, think this is the Fed’s last hike in this cycle. I disagree. One reason is that Powell has not indicated that he’s done with this cycle. In fact, he already signaled there would be at least one more after today’s. That makes sense to me. Whether that hike comes at the next meeting in September or the following meeting at the end of October remains to be seen. Again, the market currently sees it this way: [SJN] Credit: [CME FedWatch Tool]( This will change minute-to-minute over the next six weeks, so it’s not definitive. But right now, the market is assigning only a 20.6% chance of a rate hike in September. Depending on the inflation numbers, this probability will move around. One thing we haven’t talked about yet is the money supply. The Fed has done a better job of cutting its balance sheet lately. [SJN] Credit: [FRED]( The Fed’s balance sheet has shrunk considerably since its peak in 2022. When the Fed wants to reduce the money supply and control inflation, it sells assets to financial institutions, taking money out of circulation. The big bump you notice on the graph is when we had our mini-banking crisis with Silicon Valley Bank, Signature, First Republic, and Credit Suisse all going belly up. A related measure is the money supply itself. The categories of the money supply are as follows: - M1: Includes physical currency, demand deposits, and other assets that can be quickly converted into cash or used for transactions. - M2: Includes M1 plus additional financial assets like savings accounts, time deposits (certificates of deposit or CDs), and money market funds. - M3: Includes M2 plus large time deposits and institutional money market funds. According to the Fed, the money supply has fallen slightly since its peak in 2022. However, it’s seen a recent uptick. [pub] Credit: [FRED]( These are good things, as a decrease in the money supply (loanable funds) is as essential to quell inflation as hiking rates. However, I still think there’s much more room to hike rates. Here’s the reason. The Taylor Rule In plain English, the Taylor Rule is a simple guideline for central banks to decide on the best interest rates for the economy. Economist John B. Taylor first proposed it in 1993. The idea is to help the central bank maintain stable prices and promote full employment. Here's how the Taylor rule works: - The central bank looks at the current inflation rate, which is how fast prices are rising. - It also considers its target inflation rate, which is the desired level of price increase. - Then, the central bank looks at the difference between the current inflation rate and the target rate. - Next, it considers the difference between the current level of economic output and the desired output level. - Based on these differences, the central bank adjusts its benchmark interest rate. For you math geeks out there, here’s the formula: i = r* + π + 0.5 * (π - π*) + 0.5 * (y - y*) Where: - "i" represents the nominal interest rate that the central bank should set. - "r*" is the equilibrium or neutral real interest rate, which is the rate that would prevail when the economy is at full employment and stable prices. - "π" is the current inflation rate. - "π*" is the central bank's target inflation rate. (Usually 2%) - "y" is the current output gap, representing actual and potential output differences. - "y*" is the desired or potential output level. The Taylor rule suggests that central banks should adjust their benchmark interest rates based on the deviations of inflation from the target (π - π*) and the output gap from the potential output (y - y*). By doing so, the central bank can attempt to stabilize inflation and keep the economy close to its full-employment level. Luckily, the Atlanta Fed does the math for us. [pub] Credit: [The Federal Reserve Bank of Atlanta]( After today's meeting, we know the Fed Funds rate will be 5.25% on the lower band. If we zoom in on the right side of the chart, this is what the Taylor Rule and its alternatives imply: [pub] The average of the Taylor alternatives is roughly 6.75%. There are many reasons why the Taylor Rule isn’t the be-all and end-all of monetary rate discussions. These include the complexity of economic conditions, evolving monetary policy strategies, enhanced communication strategies, crisis management, and empirical challenges. Still, according to Taylor, it suggests we’re still over 100 basis points (1%) away from where rates should be. I can’t believe Jay Powell doesn’t have at least one eye on that. Wrap Up To sum it up, sit back and enjoy an iced tea today. Nothing crazy should - should - happen. Powell raises rates, and we begin the guessing game once again. How far will he go? No one knows… … but at least we have some clues. Have a lovely day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( In Case You Missed It… Why Europe is Turning Right [Sean Ring] SEAN RING Happy Tuesday! One of my favorite quotes is, “The profits of capitalism pay for the follies of socialism.” And for a long time, Europe could take advantage of American largesse. Americans worked their asses off and defended Europe. Europe bought American weaponry and took five-week vacations. But far from uniting Europe, this Ukraine business has divided it. The elites sing from the same hymn sheet, but the regular folk wants out of it. The cosmopolitans will call them lazy and unintelligent, but higher energy prices crush the country folk. There’s one simple thing Europe is learning. You can’t have “civilization” without cheap energy. It’s impossible. Empires try to acquire resources at below cost. Europe is paying four times what it needs to by importing shipped American liquified natural gas (LNG), as it would if it were still importing cheap piped natural gas through Nordstream. That’s fine if you think the war will last for a year or less, but it’s dragging on now. And the rifts are plain to see. Now, the right wing is imposing itself on the European electorates, and the “elites” - their word, not mine - don’t like it one bit. Italy, still Catholic and conservative, is no surprise. And Giorgia Meloni, while doing a good job domestically, is somewhat more liberal with her foreign policy. But Spain? France? The Netherlands? Those are much bigger surprises. In this edition of the Rude, we’ll look at Europe economically, militarily, and politically. Economic Europe Germany’s Purchasing Managers’ Index declined into recession territory. To remind ourselves, the Purchasing Managers' Index (PMI) is an economic indicator that measures the health of a country's manufacturing or services sector. It provides insight into the current business conditions, trends, and outlook. PMI data is published monthly by various financial institutions, research organizations, and government agencies. To read the indicator, a value above 50 indicates expansion in the sector, while a value below 50 indicates contraction. A PMI reading of precisely 50 suggests no change in activity compared to the previous month. Here’s Germany’s PMI: [SJN] Credit: [The Daily Shot]( In short, Germany's composite PMI (manufacturing and services) has dipped into contraction. This is entirely unsurprising considering the energy price situation. [SJN] Credit: [ZeroHedge]( From [ZeroHedge]( The Eurozone’s downturn deepened at the start of the third quarter as the region's composite flash PMI decreased by 1.0pt to 48.9, below consensus expectations, on the back of a broad-based decline across sectors., with weakening demand triggering the steepest decline in manufacturing orders since 2009, while the services sector suffered its first drop in orders for seven months. - Euro Area Composite PMI (July, Flash): 48.9, consensus 49.6, last 49.9. - Euro Area Manufacturing PMI (July, Flash): 42.7, consensus 43.5, last 43.4. - Euro Area Services PMI (July, Flash): 51.1, consensus 51.6, last 52.0. Leftist economic policies have always been Europe’s Achilles Heel. This, combined with the war in Ukraine, has been wreaking havoc on Europe’s economies. After all, it’s not like Europe isn’t productive. In fact, contrary to what most think, Europe is very productive: [SJN] Credit: [OECD]( The United States is sixth, behind five European countries. Australia is more productive than the UK. It must be the sunlight. New Zealand and Japan are way down the list. How about Christine Lagarde and her ECB? She said inflation came out of nowhere. I think she underestimates herself: [pub] Credit: [FRED]( That’s some bit of money printing, Madame Lagarde! [Download My New Survival Guide Today!]( I’ve created a BRAND-NEW “2023 Crisis Survival Guide” that I’m making available to all of my Strategic Intelligence readers today. This short 54-page document has everything you need to know to protect yourself and your family in times of crisis. Things like what foods to stock up on now, staying safe during periods of rioting and looting and more. Inside I break down all of the coming threats you face and how to prepare. [>> To see how to download your copy, click here now](. [Click Here To Learn More]( Military Europe There is no “Military Europe,” so to speak. Look at defense spending from NATO countries: [SJN] Credit: [World Population Review]( It’s a bit of a joke, really. The US spends far too much being the World’s Policeman™, and Europe spends far too little, primarily because it depends on the US. This is how Vladimir Putin is somehow unprepared for war and yet the Greatest Threat Ever™. But this is what NATO is for: to keep the Americans in, the Germans down, and the Russians out. Except it’s thirty years past its sell-by date. Whatever it is, it’s clear the Europeans want more of a say in their collective destiny. How do I know this? Well, they’re telling us. Political Europe Europeans have no economy and no military. But they have the dumbest set of bureaucrats on the planet. I’ll give you just one example. This climate malarkey. Europeans are amongst the most nature-loving and nurturing people on the planet. They don’t litter. Their companies don’t pollute. And yet, they’re slapped with the most idiotic net zero policy on the planet. It drives costs rapidly upward. Unless and until China, India, and the United States do something about pollution, nothing Europe does will matter. And Europeans are slowly getting this. Not their elites. They’re as tone-deaf as ever. But the people who are footing the bill? They get it, alright. Let’s do country by country. Spain Ok, it wasn’t the blowout victory the Right had hoped for. But the Conservatives are the largest party in the new Spanish parliament. And this is in a country that hates the right wing for its past association with You-Know-Who and Guernica. That’s how bad the Socialists have done in Spain. Hungary Viktor Orban won his fourth consecutive election as Prime Minister in April 2022. France Marine Le Pen is so close she can taste it. Le Petit Roi Emmanuel Macron has done so poorly, she might have a chance at the Elysees Palace soon. Italy Giorgia Meloni, allegedly the face of fascism itself, won her first term as Italian Prime Minister in September 2022. Sweden The Sweden Democrats became the second-largest party in Sweden’s parliament in the 2022 elections. They campaigned on an anti-Islam and anti-immigration ticket. Finland Sweden’s new NATO partner, Finland, lurched to the right in April 2023. A four-party alliance that includes the Finns Party, formerly known as the True Finns, made it into government and secured seven cabinet posts. Greece Conservative Prime Minister Kyriakos Mitsotakis easily won a second term with a record-high margin over the left-wing opposition. At the same time, the right-wing populist Elliniki Lysi (Greek Solution), the ultranationalist and ultrareligious Niki (Victory), and the Spartans (successor to the neo-Nazi Golden Dawn, which was banned in 2020) all entered the Greek parliament with a combined share of almost 13% of the vote. Germany The Alternative for Germany (AfD) party now outpolls Chancellor Olaf Scholz’s Social Democrats and just scored a watershed district election win. Germany seems to be getting over its Nazi past. Wrap Up Maybe I’m smoking the hopium, but I’m still bullish on Europe. There’s too much talent, truth, and beauty here to be wasted. I can see BRICS and the US fighting over Europe for years. And that can only be good, provided it doesn’t get violent. But first, these “elites” have to go, and it looks like the electorate is doing just that. Have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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