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Fed Chair Tells Congress to Expect Higher Interest Rates

Fed Chair Tells Congress to Expect Higher Interest Rates

March 08, 2023401 view(s)

Federal Reserve Chairman Jerome Powell spoke to the Senate Banking, Housing, and Urban Affairs committee on Tuesday, March 7. Again, Chairman Powell said interest rates would likely climb higher and remain longer than previous expectations. Even though Powell's words haven't changed since August, the market is suddenly acting incredulously that the Fed will raise interest rates higher than last month's prediction. The S&P 500, DJIA, and Nasdaq all fell about 1%, responding to the Chairman's comments, and the VIX rose nearly 2%. The VIX is the volatility index, which some call the fear index. The VIX represents market expectations  of market volatility. 

The Fed, media, and politicians are lying or treating the market with kid gloves because history says interest rates need to go significantly higher than 5.5% to tame inflation. Pundits talk about a soft or hard economic landing. The Fed moves the goalpost a little each month because the market would have a fiery crash landing if they revealed the truth too fast. At every FOMC meeting last year, the Fed released a higher prediction of the rates at the end of December 2022. When inflation started climbing quickly, every politician with a microphone said it was transitory and even denied two negative quarters growth was a recession

However, Chairman Powell has said at least five times that the tightening cycle in the late 1970s and early 1980s is the model he uses to lower inflation. Interest rates climbed more than 5% above the inflation rate in 1980. The current inflation rate is 6.41%. History says the rate should be around 8-11%. Still, the market predicts rates may reach 6% in July and then pivot lower in September. Despite every bout of high inflation requiring interest rates to climb higher than inflation, the market thinks it’s different this time, and the interest rate will not even surpass the inflation rate. 

The market has repeatedly ignored the $20 trillion elephant in the room, the Fed balance sheet. The market judged interest rates on the wrong economic model. The market is looking at the short term, and the Fed is looking at the long term. The reality is that all the economic pain felt in 2022 barely scratched the surface of economic recovery. Only about 7.5% of the contraction needed to bring the balance sheet to pre-pandemic levels has been realized. At least ten times since August, I have written about why the market was wrong about interest rates, and they will climb significantly higher than anyone expects. Read this article briefly explaining three (of many) reasons the market is wrong. 

Here is a short paragraph and graphic I made for that article. 

The excessive printing and overreaction to the pandemic created a massive problem. The Fed has almost $20 trillion on its balance sheet. It only had around $4 trillion on its balance sheet in March 2020. In the last year of higher interest rates, the Fed has only shed about $1 trillion. It could be years before the Fed will lower interest rates meaningfully. 

I have been paying close attention to Powell's words looking for his sleight of hand. If you study a magician long enough, you can figure out his trick. His trick is a sneaky one. Powell is telling the truth about the Fed’s interest rate hike intentions but not why it is doing it. The market is looking at his trick backward and coming to the wrong conclusion. The market thinks the reason is accurate, and the statements about interest rates are false. The market should read this blog to learn what my readers have known since August. 


The Fed has no options to fix its balance sheet except to raise interest rates!

When the Fed creates money, it requires a debt instrument like Treasuries or mortgage-backed securities (MBS) as collateral. During the pandemic, the Fed increased its balance sheet by over $16 trillion, with 30% backed by MBS and 70% by U.S. Treasuries. For the Fed to reduce its balance sheet, the securities must either mature or be sold. 

However, the Fed is a victim of its policy. When interest rates rise, bond prices go down. The market value of  the Treasuries decreased, so the Fed could only sell them by taking a loss. Higher interest rates have crushed the mortgage industry, so there isn’t any liquidity in the MBS market. The Fed needs to wait for the securities to mature to fix the balance sheet. $60 billion worth of Treasuries and $35 billion worth of MBS expire monthly, equating to about $1.14 trillion annually, about how much has been shaved since it started raising interest rates. 

Over the last several months, the market has acted like Don Quixote, but in reverse. Don Quixote fought a windmill thinking it was a dragon. The market hasn't been fighting the dragon because it was convinced it was a windmill. Look at Goldman Sachs and Bank of America’s interest rate predictions in 2023. At the January FOMC, Chairman Powell stated unequivocally, “It's going to take time for disinflation to spread through the economy and given our outlook, I just don't see us cutting rates this year." 

After that statement, Goldman Sachs and BOA predicted one more 25 basis point raise and a pivot. Two weeks later, the jobs data came in hot. Goldman Sachs and BOA changed their predictions to two more 25 basis point increases and a pivot. A week later, the PPI data came in hot, and Goldman Sachs again changed its prediction to three more 25 basis point rises, then a pivot. A week later, Goldman Sachs said no pivot until 2024. Goldman’s behavior is the exclamation point of how the market has reacted to every monthly inflation number over the last year. 

The market is looking at the short term. It either has no idea what is happening, or it is deliberately misleading people to set unsuspecting retail investors up to be left holding the proverbial bag. It is more the latter because Goldman Sachs employs many experienced, intelligent market analysts who know how this works. While Goldman Sachs was selling false hope and bonds destined for destruction, it bought record amounts of physical gold. Goldman Sachs is one of the 12 banks that set the price of gold, and their behavior is vile. I wrote a scathing letter to Goldman Sachs for abusing its power and misleading the market. You can read the letter here.

If you missed Chairman Powell’s speech today, don’t worry. He didn't say anything he hadn't been saying since August. He spoke for a few hours, but you need to know that rates are going higher than previous expectations. The market will behave like Goldman Sachs, begrudgingly accepting another small hike and a pivot. However, it’s all a charade.

Would a financial paper salesperson say their product will be less valuable in a year? Probably not. Who would buy it?

If it is true that people will behave how they get rewarded, then the market will always say that rate pivots are just around the corner. Markets have gone down another 0.5% since I wrote the opening paragraph. 

The VIX has increased an additional 2.1% because Chairman Powell said the same thing he has been saying since August. The market will readjust again in a month when a number comes in  hot. They will realize again that rates will be higher than previous expectation s. 

How long will market participants continue playing this absurd game? It is like Charlie Brown continuing to trust Lucy holding the football. At some point, investors will either decide they don't want to play anymore or play with a reliable holder.

Want gold to hold your wealth football instead?

Call the U.S. Gold Bureau. 


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Ryan Watkins, Op-Ed ContributorbyRyan Watkins, Op-Ed Contributor
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