The Fed Wants a Recession Badly

I’m always up for demonstrations of Fed futility [Gilder's Daily Prophecy] August 18, 2022 [WEBSITE]( | [UNSUBSCRIBE]( [Is THIS the Stock Market's Future During the Biden Presidency? (MUST SEE)]( [Click here to learn more]( Trump said the stock market would crash under Biden... But what's really ahead for investors? Bill O'Reilly investigates. [Click here and quickly prepare for what's ahead](. The Fed Wants a Recession Badly [Richard Vigilante] RICHARD VIGILANTE Dear Reader, How badly does the Fed want a recession? That’s really the question raised by one of my favorite economists, Alan Reynolds, via the most devastating, albeit politely phrased, [critique]( of Fed policy I’ve seen yet. His first observation is of the Fed’s futility, specifically that the Fed’s rate hikes are having a less than zero impact on the bond market. In the face of the Fed raising rates, 10-year bond yields have actually “fallen from 3.49% on June 14 when the fed funds rate was 0.33 to 2.78% on August 10 when the funds rate has risen to 2.32%.” In particular, the three recent large increases—50bps in May 75, in June, and another 75 “left the 10-year bond yield unphased, hovering around 2.7–2.9%.” I’m always up for demonstrations of Fed futility. Why anyone thinks the Fed can control with any precision interest rates in globally traded financial markets—and nothing is more global than the dollar—is a mystery to me. The Metaverse Story You’re NOT Hearing… [Click here to learn more]( Everywhere you turn, people are raving about the Metaverse. Facebook’s now called Meta. Microsoft’s CEO says, “The Metaverse is here.” Apple’s all in too. But there’s a critical piece of the Metaverse story you’re NOT hearing about… [Click here now for the full details](. The Scary Part The chastening part of Alan’s piece concerns the Fed’s all too real ability to force an inversion in the yield curve, i.e. short-term debt paying higher rates than mid-to-long-term debt. Since WWII, every sustained instance of an inverted yield curve has been followed by a recession. What could be interesting this time is that—precisely because the Fed can’t seem to push the 10-year yield up — the yield curve could invert with rates at low to absolute levels. If the 10-year does not move at all, just another 75 bps rise in the Fed funds rate would be enough to do it. Alan explains: “FOMC hawks and their fans who anticipate a Fed funds rate of 3.25–4.0% in the fourth quarter are effectively predicting a deeply inverted yield curve: the one-day funds rate and 3‑month T‑bill would then pay a substantially higher interest rate than a 10-year bond.” Would the 10-year remain that stubborn? Whatever factors are keeping spreads tight now are not likely to change dramatically. Fear of recession is pervasive and will likely remain so as long as the Fed keeps pushing. Loan demand slumps with the economy, or in anticipation thereof. There is not much evidence that U.S. businesses are urgent to raise money for expansion. (Though as I’ll discuss later this week, my friend Mark Skousen sees business investment as stronger than many suppose.) In any event, if banks have to borrow at higher rates than they can lend, they won’t lend. The whole business revolves around “borrow short and cheap and lend long and dear.” The Scarier Part The scary thing about all this, as Alan points out, is that if we get a recession with the Fed Funds rate at 4%, what is the Fed supposed to do about that? The standard response to a recession has been to cut the Fed funds rate, quickly, by 5 points or more. But, as Alan points out, the Fed has been able to do that only because it had previously raised rates high enough to cause a recession. Even in the Great Recession, with the Fed rate at “only” 5.25% in 2007, the Bernanke Fed slashed the rate by five points to near zero. So, what happens now? Alan offers two scenarios. In the “soft landing scenario” the Fed focuses on keeping the yield curve from inverting even though it had planned to raise rates significantly higher than it has so far. It stops about where it is now. In the hard landing scenario, the Fed keeps raising rates and we get a “significant and sustained yield curve inversion.” That leads to a recession and…the Fed responds by slashing rates by five points or more. That brings the rate back to near zero which is just what the hawks have been complaining about for a decade. As Alan points out "although waiting for a serious recession before reversing Fed rate hikes seems to be thought of as more “hawkish” than a preemptive soft-landing pause, such stop and go extremes usually end with a much lower Fed funds rate for years.” That’s how we got a zero rate for more than a decade. In economics as in war, the great failing of the hawks is to overestimate their control over events. War puts so many factors in play we can no more predict the outcome than we can model the quantum behavior of many-electron atoms. Even the victors end up in a place they never meant to be. No quality in a statesman is more valuable than humility. It would be good to see the Fed learn that lesson. Of course, then the political branches might have to do their jobs. Regards, [Richard Vigilante] Richard Vigilante Biden Just Signed Death Warrant On Your Freedom [Click here to learn more]( If Biden’s Executive Order 14067 comes to pass, a former advisor to the CIA and Pentagon is predicting legal government surveillance of all US citizens; total control over your bank accounts and purchases; and indefinite Democrat control past 2024. He says Covid was a trial run for how to control a population. Dems will use their “pandemic playbook” to silence any dissent. [Click here to see exactly what to do before it happens](. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( Gilder's Daily Prophecy is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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