Market Expectations on Fed funds, Spreads, Inflation post-CPI Release

Lower on Fed funds at February meeting. Don’t see much movement on spreads, despite talk of a pivot, and the possibility of a soft landing.

Figure 1, Top Panel: Effective Fed funds (black), and CME FedWatch implied for February 1 meeting, as of 1/13/22 (tan square), 1/7/2023 (sky blue circle), 12/14/2022 (red triangle); Middle panel: Ten year – three month spread (blue), ten year – two year spread (red); Bottom panel: five year Treasury – TIPS spread (green), spread adjusted for risk and liqudity premia (sky blue). Source: Fed, Treasury via FRED, and  KWW following D’amico, Kim and Wei (DKW) accessed 1/14, CME FedWatch accessed 1/14, and author’s calculations.

 

 

32 thoughts on “Market Expectations on Fed funds, Spreads, Inflation post-CPI Release

    1. Moses Herzog

      @ Macroduck
      It seemed like you shared my interest in following things there, or maybe you were kindly humoring me. But you seem to be a “China watcher” of sorts, and I saw this online and thought you might take a deep interest, and on the very small chance it had escaped Menzie’s radar that he would enjoy it also:
      https://www.federalreserve.gov/econres/ifdp/what-happens-in-china-does-not-stay-in-china.htm

      If you or Menzie had any thoughts or analysis after reading I sure would very much love you sharing them so I can see some things maybe I will miss after reading it.

      Note, I seem to have a bad habit of touching on papers Menzie had already addressed on the blog, if Menzie had already mentioned this paper in a prior blog post, I apologize ahead of time.

      Reply
      1. Macroduck

        Good find. And a good example of thinking beyond the obvious channel of effect. Of course economic conditions affect financial conditions, but that fact can get left out when looking only at the financial channel.

        I also think the economic channel slops over to the financial channel not just through risk perceptions, but also as increased (decreased) income generates increased (decreased) saving, so increased (decreased) demand for financial assets, blah, blah, blah.

        By the way, the sudden decline in the corporate risk spread in your link lines up pretty well with the decline in rate hike expectations illustrated here:

        https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

        Reply
        1. Moses Herzog

          It’s more than frustrating to watch this drastic nose dive in inflation and think they are still going to raise rates. The two phrases “institutional inertia” and “the madness of crowds” comes to mind.

          Reply
  1. Macroduck

    David Brooks has decided his career has been a sham. That’s not how Brooks put it, of course, but DeLong reads between between the lines of a recent Brooks piece here:

    https://braddelong.substack.com/p/it-is-harmful-to-my-psychological

    Who was the economist who worked for Jack Kemp fostering tax cuts and supply-side silliness, only to recant during the Shrub presidency? George Will seems to regret the natural consequences of his views, too, though not the views themselves; hippies still need punching.

    Kinda think Brooks may be winding down his career.

    Reply
    1. Moses Herzog

      James Kwak and I have been trying to tell (scream to) David Brooks his career as a commentator/”opinion leader” has been a sham since at least 2008. It took Brooks 15 years to figure that out?!?!?!?!~~”Physician heal thyself”

      Hunt down the video of Brooks talking to Nora O’Donnell about a U.S. congressman molesting his knee. That was one of a plethora of clues he was not equipped to be a commentator. For the record, he’s made it clear he doesn’t like bloggers either. A man who extols the virtues of free market competition, feeling psychologically threatened and slighted by those publishing their views for no charge online. You think Brooks just figured out what a walking joke he is?? Brooks wet dream is sitting down with Stephen Moore for an NYT economics “roundtable” of two livestream. Perhaps with “surprise guest expert” Arthur Laffer.

      Reply
  2. Moses Herzog

    What’s the learning curve for your average Juris Doctor?? The reason I ask is, I know one who got his from Georgetown who seems particularly slow. Was trying to get a gauge on “the norm”.

    Reply
    1. Moses Herzog

      Just to be clear, this excludes low-IQ outliers with their Juris Doctor. I don’t want Neera Tanden type low-IQ JD holders skewing the average down,
      https://www.buzzfeednews.com/article/sarahmimms/center-for-american-progress-staff-shocked-after-neera

      https://www.nytimes.com/2019/04/15/us/politics/tanden-sanders-.html

      “In 2008, Neera Tanden, then a top aide on Hillary Clinton’s first presidential campaign, accompanied Mrs. Clinton to what was expected to be an easy interview at the Center for American Progress, the influential group founded by top Clinton aides. But Faiz Shakir, the chief editor of the think tank’s ThinkProgress website, asked Mrs. Clinton a question about the Iraq war, an issue dogging her candidacy because she had supported it.

      Ms. Tanden responded by circling back to Mr. Shakir after the interview and, according to a person in the room, punching him in the chest.

      ‘I didn’t slug him, I pushed him,’ a still angry Ms. Tanden corrected in a recent interview.”

      We got it Ms. Tanden, man punching another man in chest = violence, woman punching man in chest = “push” We got it Ms. Tanden. Just like keeping a private server for White House work for regular State Dept staff = felony crime. Hillary keeping a private serve for White House work = “rural deplorables are sexist”. We got it Neera, We got it. No need to write up a court brief Neera, no need. We got it.

      Reply
  3. Moses Herzog

    https://www.yahoo.com/news/ukraine-races-rescue-people-russian-123212115.html

    Death count from this specific attack on regular citizens in Dnipro up to 29.

    Who could have foreseen this violence against the people of Ukraine?? Even the initial actions in Crimea, much less predict when Russia attacked Kharkiv and Kherson not much later on??? Who on Earth could have foreseen it?? Surely the “experts” on Russia had nothing indicating such an invasion, starting in Kherson and Kharkiv would occur…….. nothing foreshadowed such violence would occur in Ukraine……..
    https://www.theguardian.com/world/2000/jan/03/chechnya.iantraynor

    https://en.wikipedia.org/wiki/Russian_apartment_bombings

    https://www.theguardian.com/world/2008/aug/09/georgia.russia2

    https://www.theguardian.com/world/2008/aug/11/georgia.russia13

    https://www.hrw.org/sites/default/files/reports/georgia0109_brochure_web.pdf

    I just don’t understand why anyone would argue with self-described “expert on Russia” about a possible war in Ukraine back in mid-February ’22 when said “expert” with deep knowledge already knew there was no precedent?? Strange behavior by non-experts to give the “take” there would be war, with troops lined up on Ukraine’s north border. Really odd behavior. Hard to find non-expert people’s logic sometimes, isn’t it?? You’d have to be a little loopy in the head to give an alternative view to someone “widely viewed” as an “expert on Russia”. Damnded durned freaky non-experts. Probably can’t even read a Google map I bet also.

    Reply
  4. Moses Herzog

    Roughly once every 10-14 days I like to have some drinks. I rationalize this two ways, the first being I am blowing off steam, and If I didn’t blow off steam every 10 days or so with some drinks, the emotions would let out in much darker and negative ways. I say some things slightly more silly than usual, send music links to people who don’t want them. and sit in front of my computer monitor tossing them back. At the end of it, I feel a slight sense of shame, clean up the cans and one large bottle. But then I have this other rationalization (which I think is pretty good actually) for sending silly messages while drinking or even a silly blog comment, and feeling that little sense of shame when I’m finished boozing I think to myself, “There’s much worse ways I could do this, than making a bit of a fool of myself in front of a computer monitor” :
    https://www.yahoo.com/sports/georgia-ol-devin-willock-recruiting-staffer-die-in-car-crash-two-others-seriously-injured-153126355.html

    I ain’t the brightest guy in the world, maybe even often times, not the brightest guy in the room. But I can tell you ONE thing I won’t be doing during/after having some adult drinks. And I can NEVER understand those who do. It’s a “red line” and there’s a difference between those who drink and……..

    Reply
  5. pgl

    Are you tired of all that Pro-Putin trash ala JohnH? Well check this out:

    https://www.msn.com/en-us/news/world/former-russian-commander-warns-of-civil-war-that-will-kill-russia/ar-AA16niD4?ocid=msedgntp&cvid=e0fe6e9893a64bfc8e641741a432188e

    Former Russian Commander Warns of ‘Civil War’ That Will ‘Kill’ Russia
    Former Russian commander Igor Ivanovich Strelkov, also known as Igor Girkin, recently warned of “civil war” in Russia that could result in “millions of casualties” as the country continues to fight in the ongoing war in Ukraine. “There are all kinds of civil wars. There are civil wars that will kill our country in three days in winter. And it will be over in three days, but it will kill the country,” Girkin said in a clip with subtitles that was posted to Twitter on Sunday by Anton Gerashchenko, adviser to the Minister of Internal Affairs of Ukraine. In the clip, Girkin added that Moscow could “collapse into a civil war with millions of casualties, with a complete collapse and defragmentation.”

    Gee – if this came true, it would ruin JohnH’s little life.

    Reply
    1. JohnH

      “ It Turns Out Hillary Clinton, Not Russian Bots, Lost the 2016 Election.” This ought to make pgl’s day, Democratic partisan hack that he is.

      But the Russian interference narrative, based mostly on rumour and innuendo, did serve the interests of neocons and liberal interventionists well…it prepared Democrats to support a proxy war against Russia.

      Reply
      1. pgl

        WTF led to this retarded comment? Putin’s war crimes in Ukraine as “mostly on rumour and innuendo”? I guess your next stupid comment will be that the Holocaust was fake news. Dude – genocide is occurring and you seem to be celebrating that.

        Reply
      2. Moses Herzog

        After it became obvious to casual observers, Facebook admitted themselves they made revenues from paid for Russian propaganda on their platform.

        https://www.pbs.org/newshour/nation/russian-propaganda-group-purchased-ads-facebook-2016-election-heres-means

        https://www.cnbc.com/2017/10/02/facebook-says-10-million-people-saw-russian-bought-political-ads.html

        It basically makes Facebook traitors to America in the name of making a dollar (or rubles apparently). Facebook would never admit collaborating with Putin anymore than cigarette companies admitting they sell cancer conveyors or Exxon admitting they had in-house research on global warming they were causing. You know it’s extremely bad when companies finally concede those facts.

        Reply
        1. pgl

          “Most of the ads did not contain references to the 2016 U.S. presidential election, voting or the candidates. “Rather, the ads and accounts appeared to focus on amplifying divisive social and political messages across the ideological spectrum — touching on topics from LGBT matters to race issues to immigration to gun rights …”

          In other words promoting Trump’s toxic agenda. But this did not specifically help Trump? Come on man!

          Reply
      3. Macroduck

        Quotation marks without a source for a quote? Classy. And by the way, Hillary had a higher popular vote count than Trump and lost in the electoral college by the smallest margin since Bush/Kerry.

        Pretending that your Russian masters had no hand in Trump’s election is nutso dishonest. Why soil your credibility on something so obvious? Go back to claiming data doesn’t exist because you can’t locate it.

        Reply
        1. pgl

          Jonny boy was probably too embarrassed at first that he was relying on Luke Savage. Of course little Lukey must have missed that link Moses gave us ala PBS which noted:

          “Most of the ads did not contain references to the 2016 U.S. presidential election, voting or the candidates. “Rather, the ads and accounts appeared to focus on amplifying divisive social and political messages across the ideological spectrum — touching on topics from LGBT matters to race issues to immigration to gun rights …”

          In other words promoting Trump’s toxic agenda. But this did not specifically help Trump? Come on man!

          BTW – Jonny spends his whole day asking his friends at the Kremlin to find stupid rants like that one from Lukey boy. All in the service of Putin the war criminal.

          Reply
    2. Moses Herzog

      I have to fight my immediate emotional urge to cheer this on and go “Yay!!!”. Because we know from Iraq, Libya, Syria, Afghanistan, even Iran back in the ’80s, and others I’m sure Menzie and other students of history could innumerate, vacuums of power and the resulting chaos aren’t good. Let’s hope the Kremlin can get rid if Putin somewhat tidily and choose their next nutjob in an abbreviated fashion.

      Reply
    3. Anonymous

      fabulous!

      sounds like the best hope biden has to give success to the neocon rulers.

      although the Brit’s were going to send 4 Apache helps, to take out whole armored divisions, each.

      also from msn…..

      Reply
    4. Ivan

      Millions of casualties and over in 3 days can only be a civil war that immediately escalates into nuclear civil war. I don’t think that risk is high. This was more likely meant to scare those who are reluctant to tow the Moscow line or are getting ideas of taking advantage of weaknesses in central authorities (you will be nuked).

      However, the disintegration of Russia is a real possibility. The military is very regionalized and the ethnic fractionalization of Russia will only get worse as the loses mounts at unequal levels for different marginalized ethnicities.

      Reply
    1. Macroduck

      Raises questions of efficiency, but efficient own everything.

      I assume the idea is to generate electricity, then use that electricity to raise sand in times of excess output. In times when the grid requires more than is generated, sand would be lowered, turning generators to produce electricity. Each transformation involves loss. Again, efficient isn’t everything, but it’s important.

      Reply
      1. Ivan

        The issue of transmission efficiency is not a deal stopper. If I have a system with an abysmal 50% loss between intake and output from storage; I just have to put twice as much energy in there. Is that a technical problem, no, it’s economic. If the energy I store comes at half the cost of an alternative which would not need storage, then a 50% efficacy/loss is no big deal. The loses in these kinetic batteries are not nearly that big. Sure you would like efficiency to be close to 100% but its not that important. I think our local China booster had a ling to a new highly efficient Chinese system a few month ago. What makes this mining system attractive is the use of already dug holes, so construction will be very inexpensive.

        It’s similar to those using pumped water at already existing dams. All you need is an electric pump taking water from below the dam to above the dam – and you got yourself a battery. Excess electricity from days with lots of sun and wind is stored above the dam and used when needed – weeks, months or years later..

        Reply
    2. Anonymous

      like sand through an hour glass.

      i have seen estimated that to overcome intermittency problems with solar and wind that twice the lithium battery capacity to electrify human auto-motion is needed for storage to supply during outage.

      i know some research is being done on recycling automobile lithium batteries but that imposes reduced capacity of individual batteries.

      i had a conversation with a ‘principal investigator’ doing basic investigation into drilling 6 or 8 km into the earth to access very hot rock, so hot as to melt steel drill heads, the drilling would be done using microwave ‘drills’, which would keep the chamber open to permit water shot down to super heat and run turbines?????

      the engineers would have to solve problems of ‘keeping” the shaft open, running in water and harvesting the steam energy.

      likely may years away, but the microwave ‘source’ to drive energy that deep is not to far off…… research by the dod into microwave weapons ….. the energy from the miicrowaves woud be over a megawatt

      but the generation for the us army thaad radar, mobile too, is in the megawatt range.

      i am more for fission reactors which are already cost competitive!

      Reply
      1. Ivan

        Everything new always have problems and “advocates” who either blow up and tone down those problems. The postulated intermittency problem with wind and solar is mostly a red herring blown way out of proportion by commercial interests in other technologies. Decentralizing production and shortening delivery lines (to improve reliability and reduce cost) could be done much easier with solar and wind but has huge economic interests against it. The technology for solving intermittency problems have already been developed, tested and deployed at small scale for decades. Most of them could easily be scaled up to match reliability of current production and delivery systems. The only reason this has not been done yet (on large scale) is that there has not been a problem with so much green energy production that it needed large scale storage. Market forces will drive solar and wind to become an increasingly bigger share of energy production and when it becomes big enough to require storage at large scale/duration- those solutions will be implemented. Fission/fusion will not be part of the future until they can convince investors that they will be competitive with solar/wind/storage through a total cost 50 year timeframe – good luck with that.

        Reply

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