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Fed May Raise Key Interest Rates 0.5% At Its Next Meeting

By Louis Navellier. Originally published at ValueWalk.

Goldilocks Rate Hike Balance Sheet Runoff end of coronavirus stimulus checks

In his Daily Market Notes report to investors, while commenting on interest rates, Louis Navellier wrote:

Interest Rates Hike

The big news this week is the Treasury yield curve has inverted, which is a sign the that Fed may raise key interest rates 0.5% at its next Federal Open Market Committee (FOMC) meeting.  Furthermore, an inverted yield curve often precedes a recession, so U.S. economic growth is teetering.  The best way to describe what is going on is that Modern Monetary Theory (MMT), is coming back to haunt central banks, especially the European Central Bank (ECB) and the Fed.


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Where Money is Hiding

MMT is essentially unlimited money-printing and was pioneered by the ECB and adopted by the Fed during the pandemic as a way to avert a recession.  However, there is still a lot of money in circulation that the Fed created from MMT, so it has to go somewhere.  Fortunately, stocks that are inflation hedges, such as shipping stocks are still prospering.  I think it is safe to say that the Fed has created a monster and that much of that money will start hiding in 2-year to 5-year Treasuries securities, while the yield curve remains inverted.

It is very hard for the Fed to engineer a “soft economic” landing as intermediate Treasury yields soar.  In fact, I cannot remember the last time the Fed successfully engineered a soft economic landing.  So that essentially means that businesses that do not have big order backlogs will likely be increasingly teetering in a recent recession in the upcoming months.  Eventually, a weaker U.S. and global economy will impact crude oil prices and other commodities, which in turn, will “prick the current inflation bubble.”

The Tail Is Wagging The Dog

So that is the current path the U.S. economy is on.  If the Fed can avert a recession and engineer a soft landing, I will give them full credit for their actions, but right now, the tail (e.g., intermediate Treasury yields) is wagging the dog (our Fed), so we have a serious interest rate hikes to look forward to until the Fed is more in line with market rates.

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