If the Fed were hell-bent on quashing inflation, it would have raised their target range for federal funds by another 25 basis points at last Wednesday's FOMC meeting.
Instead, they opted for 'hawkish' sounding rhetoric about keeping rates higher for longer, maybe a lot longer.
Even with the economy going gangbusters, the labor market is strong and set to get stronger as the UAW leads the way to higher wages, benefits, and a shorter workweek, with oil prices approaching triple digits and gasoline prices rising worldwide - not to mention headline inflation close to twice the Fed's 2% target - that's higher-for-longer, tough-sounding rhetoric replaced raising rates another quarter of one percent.
When the Fed knows it can't raise rates anymore, they still have to appear like steadfast firefighters trying to douse inflation.
What the Fed cannot admit, which scares the heck out of them, is that about $1.2 trillion of leveraged debt on commercial real estate in America is in deep trouble.
CMBS and banks that hold large amounts of debt are facing liquidity and potentially solvency issues. Many of those same banks have been covering up holes in their balance sheets by buying deposits in the brokered deposits market and taking huge 'advances' from their regional Federal Home Loan Banks.
In the year ending June 20-2023, the number of businesses filed for bankruptcy rose 23.3%, and non-business filed for bankruptcy rose 9.5%. In 2021, taxpayers paid $32 billion for interest, and in 2022, it was $475 billion, and in 2023, it is projected to be $640 billion. To maintain that interest and fund all other government programs, the Treasury must issue more debt at higher rates.
The stock market is on the decline. The inflation rate is not going to drop to anywhere near 2%, unless we go into a very steep and deep recession. If we don't - and lately the Fed has been predicting that won't happen - we'll see a soft landing, where economic growth stalls or falters but catches itself as inflation abates and Goldilocks emerge as the face of the economy. If more growth leads to more production and consumption, more credit expansion, higher wages, higher input costs, more inflation, and higher interest rates, then the expansion of the economy will lead to more production and consumption, more credit expansion, higher output costs, higher input costs, more inflation, and higher interest rates.
But not even if stuff is starting to break, as I've been saying.
Since we're on the verge of some serious cracks spreading, the Fed opted for 'higher for longer' over another hike because 'higher for longer' is just rhetoric.
The 10-year Treasury yield hit 4.5% earlier today, which is the highest since 2007. Now, with investors - bond investors - believing the Fed will keep rates higher for longer and possibly having 'penciled in' another hike before the end of the year, why would anyone rush to buy bonds now?
Shah Gilani has a wealth of money that surpasses any other, making him a financial dynasty. In 1982, he started his first hedge fund from his seat on the board of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 started trading on March 11, 1983, Shah worked as a market maker in 'the pit'. He laid the foundation for what would later become the VIX - now one of the most widely used indicators globally. After leaving Chicago to head the futures and options division of Lloyd's TSB, Shah moved to Roosevelt & Cross Inc., an old-line New York boutique firm. He originates and established a packaged fixed-income trading desk, and established that company's 'listed' and OTC trading desks. In 1999, Shah founded a second hedge fund, which he ran until 2003. Shah's vast network of contacts encompasses the largest players on Wall Street and in international finance. These contacts give him the real story - when others only get what investment banks want them to see.