Rates have continued to dip. Forward marketplaces have transferred a lot of the way back toward no already. It has been amazing if you ask me somewhat. I expected the Fed to keep up the Fed Funds rate at a plateau level, as they did within the last two cyclical reversals. But they are almost certain to begin to lower the target rate this month, and that is great news. There is still some prospect of trading benefits in forward rate markets, I think, because brief rates are likely to go back to near zero highly. I hope the newly dovish turn by the Fed will do to give that move some oomph.
I think an important sign would be the long end of the curve. If it remains low as the Fed lowers the mark rate, this is an indicator that the Fed is following neutral rate down and isn’t really inducing nominal growth. It shall be a bullish sign, if the long end of the curve moves up.
In truth, using the adjustment I make to the produce curve, at today’s levels, the 10-season treasury yield would be effectively near-inverted rates even if the Fed lowers the prospective rate to zero. My get worried is that mistaken associations between low rates and loose money will avoid the Fed from being intense enough.
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But, recent Fed communications have been more appealing. The first graph here shows the 10-year rate vs. Fed Funds rate and shows my modeled inversion indicator. By this measure, the curve has been inverted for most a few months and transferred much farther into inversion territory this month. In some real ways, that is clearly a good sign, because it reflects expectations of near-term Fed rate cuts. But, preferably, it might be better if long-term rates held company. The fact that long-term rates are declining along with short-term expectations is a sign that frictions in credit markets were keeping long-term rates high. If you ask me, this is the best way to take into account to produce curve inversion.
Some group of frictions on the market to prevent long-term yields from declining to impartial forecasts of future short-term rates when the yield curve is inverted. I suspect that this causes problems with credit allocation that may be a causal component in the contractions that tend to follow inversions. If long-term rates decline when short term rates are lowered, that suggests that decreasing rates have removed those frictions and allowed long-term rates to go to a less biased level. So, the good news is that the Fed dovishness is assisting to offer relief to markets, but the bad news is that this means an inversion is in place and that usually leads to a contraction.
The market is currently pricing to expect the dots on my scatterplot to go sharply left as short-term rates are lowered. But, the key to staying away from a recession is perfect for the forthcoming dots to also progress. If they don’t really, then I suspect that we shall be playing catch-up and financial growth expectations will remain subdued, which will continue to lead capital to safer assets instead of into riskier investments that can cause productivity and employment strength.
Being a landlord nowadays sucks. It is a game of margins, and not very good ones, either. Yes, in a few certain areas and locations, rents can increase significantly due to certain events. But the renter gets the option of moving to a cheaper area always. The homeowner can find themselves stuck in an “upside-down” or unsalable house, if the property taxes skyrocket.
