Federal Reserve Governor Mentions the Unthinkable: That Fed Funding Rates may not Have Peaked.

What would the investment world do with their modeling, were the current interest rate environment to be designated, not as a “peak”, but rather, a “floor”?

For the second time this week, both a present Federal reserve governor and a former US treasury secretary have indicated, via interviews or prepared speeches, that inflation isn’t beaten, by any measure. A full 1/3 of the board of governors at the US Federal Reserve have now gone on the record as being concerned about the current direction of inflation, all within a space of two weeks.

At the Shadow Open Market Committee in New York, Federal Reserve Governor Michelle Bowman stated:

“While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse“.

Former Treasury Secretary Lawrence Summers said that the hot US consumer price inflation report for March means that the risk case of the next Federal Reserve move to be an increase must be taken seriously.

“You have to take seriously the possibility that the next rate move will be upwards rather than downwards,” Summers said on Bloomberg Television’s Wall Street Week with David Westin. He indicated that such a likelihood is somewhere in the 15% to 25% range.”

The present global market asset model is assumed to be weighted, in a 75%-85% bias, towards multiple interest rate cuts commencing in 2024. Even outliers, at best, one being Apollo Capital Management’s Torsten Slok; he predicts that rates will remain the same for the duration of 2024, neither decreasing, nor increasing. Yet, Slok notes that certain components within the CPI (supercore inflation) are presently accelerating at a +5% annualized rate and are not far below the 2022 high.

https://www.msn.com/en-xl/money/markets/the-supercore-inflation-measure-shows-fed-may-have-a-real-problem-on-its-hands/ar-BB1lpvah

Such pronounced bias towards interest rate declines, soon, is challenged by contrary data.

Employment rates continue to smash through monthly records. Both headline and core gauges of consumer CPI continued to gather momentum, pushing dangerously close to the 4% annualized rate in March. I believe that the multi-year wage growth awards have provided ample capability for consumers as a group to withstand higher prices, provided that they do not carry undue leverage and executives at Mastercard, who monitor payment flows from consumers on a live basis, seem to agree with this assessment.

Differing from the post 2008 real estate crash, a proliferation of multi-property home owners, via the ability to generate some income supports on secondary and primary residences through short term rentals (Airbnb et al), have managed to stave off some or most of the negative impact of rising rates, despite additional wear and tear on properties that are inherent in short term rentals. Deterioration of properties can be tolerated, for a time, before it results in legitimate depression of a valuation, but only for a time. Multiple residence owners are likely utilizing the rental income to stay current on mortgages, hoping to flip a property or two prior to major renovation expenses. Thus far, their leverage gambit has worked; will it continue to pay off if rates head higher?

If this present level of interest rates is not sufficient to diminish the annualized rates of inflation, and with election spending about to get underway to sway US voters, how will equity and real estate markets respond to an actual rate hike?

I am keenly aware that this is a heretical notion, being an election year and all, a period where a US federal government does the utmost to provide a Goldilocks economy. Nevertheless, broadly based investment directions are propelled by interest rate moves. Much of the 2023 and first quarter 2024 capital inflows to equities were anticipatory, a calculated assumption that rates had peaked and a decline in the Fed funds rate was inevitable, with the only question being, when.

What if, instead of being just premature, interest rate directional assumptions are actually wrong?

What if this isn’t as bad as it gets for interest rates, but rather, if this is the best we will see for several years to come? People remark, in passing, that our current fed funds cannot be the floor or base rate, because the interest rate cycle in the prior decade was much lower. Post real estate crash and subsequent recession of 2009, does space exist to argue that the prior decade’s ultra-low rate interval was less than a main floor, but instead, was analogous to a basement/crawl space? Should that be an accurate assessment, then the present rate period, in context, might well represent the actual floor rate for interest charges, the floor where we reside, eat and sleep.

Should the latter notion prove to have legs, the follow-through would be that multitrillion dollar asset managers were presumptive and might now, to some extent, be “fighting the Fed“, breaking a tenet of capital modeling, a cardinal rule that they actually created.

https://www.msn.com/en-ca/money/topstories/inflation-still-too-high-for-fed-to-cut-interest-rates-schmid-says/ar-BB1lwNqc

https://www.ft.com/content/c32813ca-aee2-4273-8d37-b254fc1dded8

https://www.msn.com/en-us/money/markets/larry-summers-says-cpi-raises-chances-that-fed-s-next-move-is-to-hike/ar-BB1lp4UK?cvid=2d3f07ebc95c4fec95d79eca1531baff&ei=20

https://www.msn.com/en-us/money/markets/feds-bowman-says-time-hasnt-arrived-for-cutting-rates/ar-BB1l8uuf