"I Stop Panicking When the Central Bank Starts"
A speaker argues that the Federal Reserve will likely raise interest rates despite market expectations otherwise, citing elevated core inflation above 3% and a global rate hiking cycle across major central banks. He contends that if the Fed fails to address inflation seriously, bond investors may lose confidence in holding bonds.
Summary
The speaker disagrees with the prevailing market sentiment that the Federal Reserve's rate hike rhetoric is merely posturing without concrete action. He points out that while some bullish commentators argue the Fed won't actually hike rates, the underlying inflation data suggests otherwise. Core inflation remains well above 3%, which the speaker emphasizes is unacceptably high for a central bank with a 2% inflation target. Beyond domestic factors, the speaker highlights that we are in a global rate hiking cycle, with multiple central banks having already taken action: Japan has raised rates five times, Australia three times, the ECB recently raised rates (with current inflation at 2.8%), and the Bank of England and Bank of New Zealand are expected to raise rates. Colombia also raised rates recently. The speaker argues that inflation is sticky globally and that the fair value of interest rates is moving upward, requiring central banks to follow suit. He presents a critical warning: if the Federal Reserve defies these inflation pressures and refuses to be serious about rate hikes, they risk producing even higher interest rates faster. The speaker invokes a bond market adage—that bond investors can 'stop panicking when the central bank starts panicking'—suggesting that if the Fed isn't serious about inflation, bond investors may lose confidence and reduce their bond holdings, creating additional market instability.
Key Insights
- Core inflation is above 3%, which is unacceptably high for a central bank with a 2% mandate
- Multiple major central banks are in a synchronized global rate hiking cycle, including Japan (5 hikes), Australia (3 hikes), the ECB, Bank of England, Bank of New Zealand, and Colombia
- Inflation is sticky everywhere globally and the fair value of interest rates is moving upward, requiring central banks to follow
- If the Fed defies inflation pressures and is not serious about rate hikes, they risk producing higher interest rates faster paradoxically
- Bond investors operate by the principle that they can stop panicking when central banks start panicking, implying that bond holders may exit the market if the Fed doesn't take inflation seriously
Topics
Transcript
[0:00] Right now, there's a feeling, Jim, that this is rhetoric, but they're not actually going to go ahead with a rate hike. That seems to be what everyone who comes on this show seems to indicate, at least people who are saying that they're bullish. The broadening out theme in equities. Why do you disagree? Because you believe that they will hike rates. What do you think will drive them to even with the disinflation that we're seeing from oil prices? >> Well, it's more than just a disinflation because you've got higher core inflation right now, well above 3%. I might also add we're in a global rate hiking cycle. [0:30] Japan has raised rates five times. Australia's…
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