Where The Feds Go To “Retreat”

Jackson Hole, Wyoming is where Federal Reserve Bank big shots go in late August to contemplate not nature but the direction of interest rates and all of the related economic matters that go with it. The biggest of the Fed big shots, Chairperson Jerome Powell is widely expected to proclaim the need for even higher interest rates to “combat” inflation.

It’s called a “retreat” and if you receive an invitation from the host, the Federal Reserve Bank of Kansas City, you’re definitely on the A-list of those who count among the nation’s economists. The idea is that if they can get away from the drab offices in the big cities, maybe a new idea will pop into their heads, however unlikely that may seem.

The concern this year is that inflation remains at levels considered in the “too high” range. This is despite the recent drop in the price of gas at the pump. The problem remains with the lofty CPI and PPI numbers – these need to come down according to those who closely and religiously practice the dismal science of economics.

So, the solution, widely acknowledged by experts and financial journalists, is to keep raising interest rates and that’s what Jerome Powell will be expressing when he makes his big speech on Friday. How much of an increase is debated far and wide but it’s likely to be another ¾% upward for the fed funds rate.

They want the stock market and the real estate market to cool off even more than they’ve already cooled off. How this is related to the CPI and the PPI is the subject of many economics PhD dissertations which could be found and studied, but the main thing is: if Powell and the retreat crowd say interest rates need to go up, then they’re going up.

A lot of this is already priced in over at the bond market where the 2-year Treasury note and the 10-year Treasury note are flirting with much higher yields than expected.

Here’s the point-and-figure chart for the 2-year yield:

Note how the yield is breaking above that long-term downtrend line (in red) for the first time in many, many years. There are already many more sellers than buyers of the 2-Year note as the yield climb higher to attract interest. To put it another way, this part of the bond market is already pricing in what Chair Powell is about to proclaim.

Here’s the chart for the 10-Year Treasury Note yield:

Indeed, even the 10-Year yield is breaking above the long-term downtrend line in red. That both the 2-Year and the 10-Year yield are already on their way higher confirms just how “priced in” Powell’s remarks are – and he hasn’t even uttered them yet.

This new direction for interest rates is quite a change from the recent past and carries with it deep concerns for whatever comes next in the economy. How much further can these yields go before Fed officials decide to hold off and work toward lower levels? That depends on the next few month’s CPI and PPI readings.

Here’s hoping that Federal Reserve Bank big shots enjoy the beauty and quiet of Jackson Hole, Wyoming. It’s unlikely they’ll be enjoying beauty and quiet this winter as the increasingly higher interest rates designed to lower inflation also have the effect of halting growth in real estate and stocks.

Not investment advice. For educational purposes only.