Here’s the problem fueling the Fed – and it’s not inflation, says the strategist

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The recent surge in bond yields has finally caught the attention of Federal Reserve policymakers. Governor Lael Brainard said Tuesday that “some of these moves last week and the speed of the moves caught my attention.” Mary Daly, president of the San Francisco Fed, said the central bank could change the duration of its bond purchases – or even, as before, sell shorter-term securities to buy longer-term government bonds in what is known as a “twist”.

Steven Blitz, chief US economist and chief executive of global macros at TS Lombard research agency, says the Fed’s determination to keep interest rates low through quantitative easing is fueling another problem. Commercial bank lending growth is slowing at a time when the economy is accelerating.

According to the latest weekly Federal Reserve data, commercial bank lending grows about 5% year-over-year as mortgages are carved out that banks don’t keep on their balance sheets. That’s a 10% decrease in April.

The Fed’s holding of government bonds to manage yields isn’t inflationary as the central bank has to hold commercial bank assets, Blitz says. Commercial banks don’t mind that the Fed pays them interest on an essentially risk-free transaction. The Fed now holds 16% of commercial banks’ assets, up from 6% in 2019.

“This exercise is a reminder that the Fed cannot forever protect markets from the cost of funding government bonds that are growing faster than nominal GDP. Right now the economy is below equilibrium interest rates, but high reserves and capital constraints in a broader sense mean banks cannot fully help others take advantage of the growth through borrowing that those low interest rates would suggest, ”says Blitz.

Far from predicting a surge in inflation, Blitz says the core personal consumption spending measure for prices will only increase 1.3% in the fourth quarter and 1.7% next year. Blitz said the projected $ 1,400 stimulus checks and COVID-19 vaccinations will boost the economy, but at a relatively lukewarm annual rate of 4.5% by the fourth quarter, rising to 2.8% next year slowed down.

The buzz

Texas is ending its mandate to wear masks and removing all restrictions on businesses. Rides provider Lyft LYFT (-0.49%) rose 6% in premarket trading after posting its busiest week since March 2020 as it narrowed its loss estimate.

Rocket Cos. RKT (+ 71.19%) will be in the spotlight after the mortgage company’s stock rose 71% on Tuesday. This is a step compared to brief pressures that temporarily raised the shares of video game retailer GameStop GME (-1.84%)..
Rocket stocks fell 7% in the early Actino.

The server and storage provider Hewlett Packard Enterprise Co. HPE (-0.68%) reported earnings and sales for the first quarter to the end of January that were above forecasts.

ADP reported a slowdown in private sector hiring from 195,000 in January to 117,000 in February. The Fed’s ISM service report and Beige Book of Economic Anecdotes are also due to be published.

The market

After falling on Tuesday, US stock futures ES00, -0.10% NQ00, -0.23% indicated a stronger start, with the Dow Industrials YM00 gaining + 0.05% over 100 points.

The 10 year Treasury TMUBMUSD10Y return of 1.464% was 1.46%. Bitcoin BTC.1, + 8.52% futures surpassed the $ 50,000 mark while Gold GC00, -1.36% futures fell.

The graphic

Fund manager Columbia Threadneedle has created a return-to-normal index for the US based on a number of measures, such as: B. Traveling, shopping in stores, and eating out. It is not intended to capture economic indicators such as gross domestic product, but rather focuses on measuring components of daily life. The recent increase was due to the return to personal schooling.

Random readings

Singer-songwriter Dolly Parton converted her “Jolene” track to “Vaccine” when she received the first dose of Moderna MRNA, -6.73% COVID-19 vaccine, which she helped fund.

In contrast to some small children, squids can pass the so-called marshmallow test, which is used to measure self-control.

Here’s a low value for you: A small china bowl that was bought on a sale in Connecticut for $ 35 is up for auction. Broker Sotheby’s says it can fetch up to $ 500,000.

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