September 22, 2022
The Fed is not kidding anymore and has fully bought into “inflation is bad”. Chair Powell and the politicians assured us for months that inflation was transitory, while injecting trillions of new money into the system. They have seen inflation take solid hold in the broad economy and the labor markets. Low unemployment rates and union power has combined to raise wages, however those wage gains don’t really keep the workers’ wages ahead of inflation. But, the wage gains will stay regardless of when inflation is again brought under control. As Volcker learned, you have to blow up the mindset that goods and services will be higher next week/month/year to beat inflation. He did it with a deep recession. The Fed and some politicians think (hope) its going to be a “soft landing”. We’ll see.
The Fed increased the funds rate by another 75 bps yesterday and Treasuries moved higher. Since the beginning of September, yields on all treasuries have moved 20-30 basis points higher. The ten year rate has gone from 2.60% to 3.70% since August 1. One month rates moved higher by about 50 bps to 2.73%. No one is talking too much about the yield curve any more since we seem to heading for a recession. The spread between three month T-bills and 10 year bonds is now at 41 bps, down from 105 bps.
The dollar continues to hit record highs against most world currencies which of course is not good for agriculture. But the ports, with the exception of some work slowdowns and rail issues, seem to be moving better with lower prices for containers.