The Fed: Higher for Longer at the Long-End

Discussion

As anticipated Saturday evening at 7:12pm EST via Xwitter, Nick Timiraos penned his Jackson Hole preview piece Sunday morning - its message did not disappoint. In what promises to be almost verbatim what FED Chair Powell speaks about on Friday 8/25, Timiraos detailed how the Fed wants long-term interest rates higher for longer.

This is a big change from the Fed’s heretofore almost exclusive focus on the Fed Funds Rate (FFR). They appear to now realize that the harder they push on the front-end of the curve via the FFR the less restrictive the long-end becomes due to inversion. As they slow-walk the final couple/few hikes they’re letting the long-end of the UST curve breathe as Treasury ramps up coupon issuance and economic growth stays firm if not reaccelerates.

If the Fed was at all uncomfortable with the recent move in UST and TIPS 10s and 30s, they would have pushed back in person and/or via Timiraos. Instead, Mary Daly and Neel Kashkari were relentlessly hawkish in recent appearances; Larry Summers was deployed to float a long-term average UST 10s target of 475 bps; and most importantly, as discussed above, FED mouthpiece Timiraos brought down the hammer on “higher for longer at the long-end”.

This is not tough talk by the Fed, this is the real deal, as confirmed by

Julian Brigden’s policy contacts. Regular readers of The WOTE know how much weight I put on Brigden’s FED analysis (see here and here), as his policy contacts were instrumental in allowing me to pivot in December 2021 well ahead of Wall Street consensus. I won’t go into detail out of respect for my own source on Brigden, but suffice it to say, the Fed is ON THE MOVE. Coupled with the fact everyone and their brother wants to go long the long-end, this move in rates is just getting going unless the labor market starts to crack ASAP.

History strongly suggests UST 10s should average 250 bps above YoY Core CPI, which means at least 450 bps with inflation at 2%, but more likely 550-650 in a 3-4% inflation world.