Inflation worries? You’ve got to be kidding but bond market starts to price in higher interest rates

Fed promises massive asset purchases for longer

Today’s (Wednesday, December 16) meeting of the Federal Reserve, the last of the year for the central bank, ended with the promise to maintain the current massive monthly bond purchases of at least $120 billion until the Fed sees “substantial further progress” in employment and inflation. This replaces the earlier promise to keep  buying “over coming months.” In other words the Fed’s bond buying policy now fits into the Fed’s interest rate framework of extraordinarily low for an extraordinary long time.

Saturday Night Quarterback says, For the week ahead expect…

Saturday Night Quarterback says, For the week ahead expect…

Expect news from the Federal Reserve and from Congress on a government shutdown and a new coronavirus stimulus/relief bill. The Federal Reserve’s Open Market Committee meets on Wednesday, December 16. The markets expect the Fed to leave interest rates unchanged, but there’s likely to be verbiage out of the central bank that will move markets, although perhaps just fractionally.

Saturday Night Quarterback says (on a Sunday), for the week ahead expect…

Saturday Night Quarterback says (on a Sunday), for the week ahead expect…

Thursday action by Treasury Secretary Steve Mnuchin to terminate the Federal Reserve’s access to $195 billion in backup funding on December 31 will just increase the volatility in a bond market that was already experiencing a tug of war between expectations for faster growth in 2021 (and hence higher interest rates and lower bond prices) and worries about an economic slowdown in the coronavirus economy and Congressional inaction on any virus stimulus package (and hence lower interest rates and higher bond prices.) The tug of war will play out in the short holiday week which packs big funding activities by the Treasury into the first two days of the week. Monday and Tuesday will see the auction of nearly $200 billion in 2-year, 5-year, and 7-year Treasuries.

Yields on the 10-year Treasury pull back a bit in today’s auction

Trick or trend: Treasury Secretary Mnuchin just undermined the Fed and the economy–how bad will the damage be?

On Thursday night, Treasury Secretary Steven Mnuchin sent a letter to Federal Reserve chair Jerome Powell announcing that he was not going to extend beyond December 31 the emergency lending support that the Federal Reserve using as a backstop in its programs to stabilize the bond market. In March, Congress ha earmarked $454 billion to support Fed lending programs as part of that months coronavirus package. The Fed, ever reluctant to take losses onto its own balance sheet, had used the Treasury cash to stand behind loan programs for medium size businessses and municipalities. Much of that money earmarked by Congress has never actually been extended to the Fed, but the Treasury did earmark $195 billion for specific loan programs at the Fed. It’s that money that Mnuchin now says will no longer be available to the Fed after December 31.