Published: Sat, October 13, 2018
Money | By Armando Alvarado

Trump says Fed 'out of control' but won't fire Powell

Trump says Fed 'out of control' but won't fire Powell

Bond yields, which have spiked over the last week, slid after the Labor Department said consumer prices grew only slightly in September. The 10 year could go to 3.5%-3.6%. And as a result, for reasons I won't go into here, the stock market would be lower than it is. He also mentioned the Fed is monitoring other risks - "the strength of economies overseas, the effects of ongoing trade disputes, and financial stability issues" - all of which, if they prove real, would suggest less tightening rather than more as a monetary policy response.

Yet the climb in interest rates also reflects an economy that's still managing to accelerate on the energy of an expansion in its 10th year - the second-longest such streak on record.

How could the interest rate hikes cause an economic crisis? "The dollar is very strong, very powerful and it causes difficulty in doing business". Two weeks ago, the Fed raised its benchmark rate for the third time this year, and the federal funds rate now sits at a range of 2.00 percent to 2.25 percent.

The sell-off wave that has hit USA equities this week is also affecting the world's other economies, veteran trader Jim Rogers has told RT. Even worker wages are finally showing signs of life after idling for most of the recovery that followed the housing crash. For example, a grocery store that raises prices by 2.5 percent a year, and borrows in short-term markets at 2 percent to finance that inventory, is pocketing a half-percentage point on rates alone, not even including the mark-up between wholesale and retail prices.

I suspect that long-term rates will keep rising, at least for a while.

Higher rates are meant to prevent the economy from overheating and causing inflation or a financial bubble. An increase in interest rates makes debt more expensive, while a corresponding decrease can make it cheaper.

"So you can say that, 'well that's a lot of safety actually.' And it is a lot of safety, and it gives you a lot of margin".

Overall, the "Bond King" is bearish on bonds, bearish on stocks. "It's all about investors rethinking their exposure to stocks".

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But the falls are now spreading beyond technology stocks. That's good news for savers and investors looking for more income.

When expenditures on capital and labor are strong, companies are betting that robust demand will allow them to profitably grow their businesses.

One measure of fear in the market is at its highest level since April. It has shed 1,378 points over the past two days.

In effect, higher mortgage rates could depress the rate of price appreciation of houses, as homebuyers cannot bid as aggressively for properties as they could when rates were lower. In other words, the steady rise in the Fed's policy rate, and estimates for future hikes, haven't translated into harsh financing conditions for the overall economy yet. That would help the case for holding onto stocks.

There are multiple ways that the Federal Reserve can manipulate the economy through interest rates.

Why? Because long rates, which have been rising gradually all year before bursting into public view last week, had been held at artificially low levels for years by the Federal Reserve's so-called quantitative easing.

Get the Monitor Stories you care about delivered to your inbox. The Federal Reserve is the agency with the biggest sway over the economy.

This story was reported by The Associated Press.

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