I know that you know that this is the former Chair of the Board of Governors, Ben Bernanke, and not the current Chair, Janet Yellen.  Ben Bernanke navigated the U.S. through the most difficult financial crisis in 80 years, and it is he who said “Monetary policy is 98% talk and 2% action”.  That idea is a good way to introduce the Fed meeting yesterday.

The Fed raised the overnight lending rate to 1.25%, an increase of 1/4%.  That will instantaneously raise the Prime Rate to 4.25%, affecting credit cards and other short-term debt instruments like car loans.  It should also raise the yield on your savings account and certificates of deposit.  The financial markets all expected this move and so the hike was already priced into long-term debt like mortgages, student loans, and the next iPhone.

Chair Yellen yesterday laid out a plan to begin to sell off the Fed’s $4.5 trillion dollars in long-term debt holdings.  For the last eight years, they have been the world’s largest buyer of Treasury Notes and Mortgage Bonds, accumulating and then reinvesting the proceeds of sold Notes (from people cashing in Treasury Bonds or refinancing their mortgages) by purchasing new Notes/Bonds at the rate of $20-30 billion per month.  That will begin to unwind once the Fed Funds Rate reaches 2.0% (presumably the first of next year).  The plan is to allow $4 billion in mortgages and $6 billion in Treasuries to roll off the books every month, and to gradually increase the amount to a combined $50B/month “if the economy evolves inline with expectations”.  Assuming that the hopes of the economy fulfilling the well-crafted statement come to fruition, it will take at least a decade to unravel the balance sheet in an orderly fashion.

After digesting the Fed Show yesterday, mortgage bonds took a slight breather and opened down by about 0.15 bps.  Overall, interest rates are still better than they have been since last fall’s presidential election.  Nationwide, the average conventional 30 year loan is at 3.91%.  My rates are better than that and my service and turn times are also hard to beat!

So the Fed did in fact raise their rate 0.25% yesterday, and over the next three hours, both stocks and bonds rallied.  The MBS market in fact, jumped 75bps, allowing mortgage rates to settle back into their pre-meeting groove.  What gives?  During her speech, Janet Yellen gave several cues (or should I say “coos”–ha ha) that indicate that the Fed may be lowering its expectations on the speed that the economy should be expanding.

The first is the observation that core inflation, excluding food and energy costs, is still under the target 2.0% growth rate that the Fed is expecting.  They want the growth centered on 2.0% (allowing for readings higher or lower that 2.0%) whereas before, the target was the 2.0%-2.5% range.  The second cue that all is not rose petals and puppy dogs is that the vote to hike rates yesterday was not unanimous; there were voting board members in favor of leaving rates unchanged.  Still it happened, and still, Ms. Yellen is planning on three 0.25% rate hikes this year and next year.

Since Chair Yellen is testifying before the House Financial Services Committee this morning and is essentially giving the same message that she did yesterday before the Senate, it’s probably a good idea readdress her address.  Over the last few years, she has mostly focused on the constraints currently keeping interest rates lower, and the disadvantages associated with raising prematurely.  That tone today has been changed to focus on the benefits of raising interest rates sooner rather than continuing to wait.  Ms. Yellen re-affirmed the Fed’s three-hike plan in the year 2017.  Fed Fund Futures place a 30% chance of a rate hike in March, a 50% chance in May, and a 100% chance for June.  Aside from raising short term rates, the Fed will also allow long term rates to rise by phasing out their current repurchase plan after enacting the three bumps–especially in mortgages holdings–by allowing their current $4.5T balance sheet to taper down significantly next year.  If you are on an ARM, you’d better have a pretty solid exit strategy.

I have given ADP a hard time in the past for being a poor predictor of the official Jobs Report, which always comes out two days after ADP releases their numbers.  Over the last year or so though, ADP has been pretty spot-on.  Will this be the month that again tarnishes their reputation?  I hope not.  This morning, ADP is showing that there were 246,000 new jobs opened up last month, 30% higher than the expected 168,000, and way better than last month’s 153,000.  Some say this is because of the positive optimistic outlook on business owners, some say it’s  a new year with new budgets to spend.  I just hope it’s accurate.

Janet Yellen & Co. wrap up their two-day FOMC meeting today. At the last press conference, Ms. Yellen downplayed the need for future stimulus, nothing that the current economy is very close to meeting the Fed’s indicated targets.  Perhaps, just perhaps, higher interest rates and higher inflation are on their way?  We’ll know a little more in three hours.     

Jargon in Jackson

Once a year, economic chiefs and finance ministers from around the globe get together in Jackson Hole, Wyoming to drink beer, wrestle steer, and talk about monetary policy.  I am actually not sure about the first two events, but the gathering’s theme “Designing Resilient Monetary Police Frameworks for the Future” does include a symposium with Janet Yellen as the keynote speaker.  Since most you were probably not in attendance at the rousing rhetoric delivered by the Chair of our very own Federal Reserve, here are the Cliff Notes:

The Fed has the tools to fight off the next recession.  They may choose to broaden their asset purchases (they already own more now than at any other time in history) to regulate longer-term Note yields.  Ms. Yellen anticipates gradual rate hikes over time, and the case for a hike by the end of the year has strengthened in recent months.

If I may collide worlds again by educing the elocution into a tidy metaphor: regarding current interest rates, now is the time to strike while the iron is hot. (!)

Rates Rise, but not Rapidly

For the eighth and final time this year, today is Fed Day.  And for the first time since April 2006, the Fed raised rates today by 0.25%.  It’s the first time since October 2009 that they have even touched them–well, directly that is.  The Fed can only regulate their Fed Funds Index, which up until two hours ago had been at zero for the last seven years.  Other than that, the Federal Open Market Committee ordinarily relies on hints and pointed observations to sway investor capital in and out of investments that drive interest rates on the longer-term loans. They of course also buy and sell billions of dollars worth of various debts every month to regulate the flow of money.

In her prepared statement this afternoon, Janet Yellen said that the Fed will remain accommodative, and reiterated their plan for a “gradual rise” in rates.  Stocks are up about 1.5%, and Bonds are flat after the well-anticipated announcement.

Louie Says Lock

First off, it would be a lot more fun tracking the carefully crafted statements of a comedian, a vacation planner, or even my dog Louie (pictured here) than it is to hang on every word coming out of the mouth of the Chair of the Federal Reserve.  Nevertheless, as uninteresting as it is, this is my job.  Today, Ms. Yellen spoke to the House Financial Services Committee on Capitol Hill about new plans for bank regulation and supervision.  She said nothing that will change the way I bank and nothing of monetary policy matters, but she did voice that diminishing downside risks in the global environment are allowing the domestic economy to perform well, and concluded that there has not been any decision made still about hiking rates in the December FOMC meeting.

Wall Street now wagers a 60% probability that the Fed raises rates in December, up from 57% yesterday and 35% seven days ago.  Mortgage pricing continues to deteriorate pushing long term rates upward.  Louie says lock in your loan today.

Raise Rates to Not Increase Inflation

I know I know, I have used this image before.  I am an old hack who is unoriginal in his thoughts, but it’s Friday and this actual photograph of the Federal Reserve Board Chair Janet Yellen is an uncanny metaphor of her “hawkish” 23 page speech at the University of Massachusetts last night.  Ms. Yellen said that the Fed will likely raise interest rates later this year (read: December) as a result of improvements in the labor market, and expects that inflation will tick up shortly afterward.  (BTW: in economic speak, a hawk is generally someone who favors higher interest rates to keep inflation in check.  Chair Yellen is insinuating that by raising interest rates, the chance of inflation spiking out of control will be mitigated.)

If you didn’t understand any of that besides “raise interest rates”, you got the point.  Watch for interest rates to start coming up.

Janet the Hawk

Looking more like an inflation hawk than her usually dove-ish self, Fed Chair Janet Yellen testified on Capitol Hill this morning.  Here are three main points out to that speech:

1. Gradual interest rate increases will be contingent on how soon interest rate increases begin. The longer the wait to raise, the less gradual subsequent increases may be.

2.  In regards to the current ability to originate new mortgage loans: “Dodd Frank standards have kept us from slack lending standards, but have had some unintended consequences” .

3. With regards to Puerto Rico, it is appropriate for Congress, but not the Fed, to step in as a creditor.

After a drop at the outset on the heels of a hot PPI (up 0.4%), pricing on mortgages is up 32bps from the opening bell.  This seems to be coming not from Ms. Yellen’s comments, but from outspoken economists rebuttals