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CB's STILL hold key rate steady at 5%
May 5, 2024
10:32 pm
smayer97
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Picking up on these previous discussions, March 6, 2024 - Bank of Canada holds key rate steady at 5% and How does the Bank of Canada and the Federal Reserve determine interest rate changes?!

The central banks continue to hold rates...why, when for months they keep saying they want to decrease the rates? Only of late have they been pulling back some on those comments... reason? I suggest that though the market dipped early on, before the CB's announced their desire to decrease rates, the market simply is not giving them the breathing room to do so, and instead the US bounced back, and while CA has dipped slightly, yet both are holding steady for the most part, in spite of their ongoing signalling to want to decrease rates.

Keep your eye on the short-term bond market to see where the CB's might go next.

May 6, 2024
6:30 am
mordko
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CB’s lack of action is exactly aligned with what CB messaged in January.

“… the bank is not saying interest rates will be falling soon, given continued concern about inflation.

In a prepared speech, Macklem pointed out that inflation has been falling over the past few months as increased interest rates driven by the Bank of Canada have helped slow the economy.

…But "inflation is still too high," he said, pointing out that there are still inflationary pressures. The governor told reporters it's "premature" to be discussing a cut to interest rates.”

The bank is quite good at messaging the market what it will do next (in the short term).

https://www.cbc.ca/news/business/bank-of-canada-interest-rate-january-1.7093055

May 6, 2024
7:56 am
lifeonanisland
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For me, the entire conversation about lowering interest rates that we continue to hear and see seems to be disconnected from reality. Headline after headline on my finance news feed features an economist de jour insisting how rates will drop next month, and how many times rates will drop by the end of the calendar year, etc. But who are these economists? Almost always, it seems like they're industry shills whose livelihood and that of the corporations they work for are being negatively impacted by higher rates and the resulting slowing of frenetic economic activity (particularly real estate sales). And when unaffiliated, academic types of economists speak in more realistic and sensible tones, their voices and assertions aren't given the same type of media coverage.

For example, the predictions made late last summer by Rotman associate professor emeritus of economics Peter Dungan didn't exactly get a lot of airtime.

“[The policy rate] is not going back to two — it’s just not — unless we have a serious recession or emergency,” said Duggan, who believes that central banks in Canada, the US and around the world fueled inflation because they knew that interest rates were unsustainably low in 2020. “Those numbers are gone for good, except as a way to stimulate the economy, so you might go to 4.5 per cent, but it will probably be north of 4 per cent until the next serious emergency, when central banks need to cut policy rates drastically to help the economy.”

In other words, if inflation cools, we might see a couple of quarter point drops -- but that's it, unless total economic catastrophe looms. It's not a total contradiction of the industry-affiliated economists, with their calls for lowering rates by a quarter point in June or July. But it seems to be a more sobering and realistic way of predicting the future path for central banks. In contrast, industry shills call for rate drops in a euphoric way that implies to many hopeful cash-strapped debtors that a couple of quarter point drops will be just the beginning of a rapid restoration of pre-inflation rates.

By the way, today's move by Tangerine to raise 4 and 5 year GIC rates to 5 percent adds credence to Duggan's predictions. It seems likely that more FIs will be wooing depositors with similar rates soon.

I do agree that the federal banks telegraph reasonably well what they will or will not do in the short term. What I think they could do better is to clarify what is obvious to anyone who takes the time to listen and look around them: that while rates may drop a little as inflation cools, they will never get back to the low pre-pandemic levels we saw, and, in particular, the insanely low levels at the beginning of the pandemic. In this regard, central banks could do a much better job of cooling the unreasonable speculation that the free money train will be once again pulling into the station in the months and years ahead (barring a serious economic collapse).

May 6, 2024
8:12 am
smayer97
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"Looking around" I see the CB is simply communicating what the market has already been doing... Note too that the US vs CA bond markets are doing slightly different things, even though they are both operating with similar respective CB messaging... :-\

May 6, 2024
8:16 am
AltaRed
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I think BoC has been better at saying the new 'neutral' rate will be higher in the future than it has been in the past than has the Fed Reserve but I may be mistaken. My guess in the absence of a major event, neutral rate will settle in the ~3+% range as compared to current range estimates of 2.25-3.25% https://www.bankofcanada.ca/2024/04/staff-analytical-note-2024-9/

It does not seem probable that the neutral rate will fall back to 2019 rates (note the lowest rates occurred during the pandemic). Back in 2014, the nominal neutral rate was estimated at 3-4% https://www.bankofcanada.ca/2014/09/discussion-paper-2014-5/ and is where we should hope it to be, but may not occur given our western economy simply no longer has the GDP growth strength (productivity) to support 2014 style rates . Only time will tell over the next 1-2 years which is how long I think it will take to settle in to a new nominal neutral rate.

May 6, 2024
11:05 am
mordko
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Does not matter what CBs say. If we see another economic crisis, there will be another round of monetary easing, zero/negative, bond buying, etc. Will be the right thing to do and they’ll have no choice. Just like when they promised zero rates forevermore and were forced to change mind by Mr Inflation.

May 6, 2024
11:54 am
AltaRed
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Agreed and that is really the point of the changing views of 'neutral interest rates'. But be wary that this thread is a continuation of the dispute/disagreement from months back on who is the cart and who is the horse. I am not engaging in that silliness again.

May 7, 2024
6:51 am
smayer97
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mordko said
The bank is quite good at messaging the market what it will do next (in the short term).   

The bank is quite good at messaging what it wants to do next....but ....

mordko said
Does not matter what CBs say. If we see another economic crisis, there will be another round of monetary easing, zero/negative, bond buying, etc. Will be the right thing to do and they’ll have no choice. Just like when they promised zero rates forevermore and were forced to change mind by Mr Inflation.  

In other words, the market determines the direction and amount of the rate changes 😉

May 7, 2024
10:04 am
mordko
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smayer97 said

The bank is quite good at messaging what it wants to do next....but ....

mordko said
Does not matter what CBs say. If we see another economic crisis, there will be another round of monetary easing, zero/negative, bond buying, etc. Will be the right thing to do and they’ll have no choice. Just like when they promised zero rates forevermore and were forced to change mind by Mr Inflation.  

In other words, the market determines the direction and amount of the rate changes 😉  

You are missing the timeline. CBs can and do “predict” what they are going to do at the next meeting. They do it well. And bond traders react. Both CBs and bond markets are far, far worse at predicting next year’s inflation, employment and economic strength, and therefore overnight interest rates.

May 7, 2024
10:49 am
smayer97
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And yet when the CB's talked about wanting to lower the rates, the markets did not react in like kind, and either brushed it off and stayed the course or went slightly the other way.

The market can read the tea leaves too, so they are not totally dependent on what the CB says they want to do, but it certainly can help if the CB is in agreement with the market... then they are more likely to move in the same direction, with the market taking the lead, but only if they agree.

May 7, 2024
11:04 am
mordko
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smayer97 said
And yet when the CB's talked about wanting to lower the rates, the markets did not react in like kind, and either brushed it off and stayed the course or went slightly the other way.

I think its because most people can read and understand what it means when the governor says (and I quote) “it's "premature" to be discussing a cut to interest rates.”

May 7, 2024
4:55 pm
savemoresaveoften
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If CB openly says ‘next meeting they will cut rates’, you will not see bonds selling off in reaction to that. In other words, bond traders listen to what CB says and act accordingly.

May 7, 2024
5:50 pm
smayer97
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WOW memories are short... and selective...

You forget the many times the Fed signalled wanting to cut rates, anticipating rate cuts within months, at several meetings in a row, only to backpedal on that... why? because the market read the tea leaves differently and did not respond to the CB messaging. And so, here we are, now talking about possible rate hikes instead. :-\

May 7, 2024
6:12 pm
mordko
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My memory isn’t great but at least I can read. Unlike some.

November meeting.

The Fed is not thinking about rate cuts right now at all, Powell says

Fed Chair Powell stressed that the central bank hasn’t begun considering a rate cut, and it won’t until inflation is brought under control.

“The fact is the committee is not thinking about rate cuts right now at all. We’re not talking about rate cuts,” Powell said. “We’re still very focused on the first question, which is ‘have we achieved a stance of monetary policy that’s sufficiently restrictive to bring inflation down to 2% over time, sustainably?’ That is the question we’re focusing on.”

May 10, 2024
4:07 am
smayer97
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Your condescension is unnecessary, unless it makes you feel better.

What I present is an alternative view, and yes, it stands contrary to the common belief.

Here is what I see:
- short term bond markets have been anticipating the Fed to decrease rates since at least last summer (July),
https://www.wsj.com/livecoverage/fed-meeting-interest-rate-decision-today-july-2023/card/sure-the-fed-could-cut-rates-but-maybe-not-much-fZjovjM0braaBllWNxav

- In Nov 2023, market anticipating up to 6 rate cuts in 2024, even though the Fed kept saying "... that interest rates will remain higher for an extended period of time"
https://www.businessinsider.com/economy-slowdown-interest-rates-outlook-federal-reserve-cuts-next-year-2023-11?op=1

- Yet, the market started holding the rates since Jul 2023, then even decreasing the rates up to the end of Jan 2024, in spite of the Feds comments.

- It was during this time that in mid Dec, "The Fed’s message Wednesday strongly suggested that it is finished with rate hikes" (AFTER the markets were already moving down)
https://apnews.com/article/federal-reserve-inflation-prices-interest-rates-cuts-d95b976ef2194cea8516f21c98f62ded

- it is only then that they "...forecast that they will cut borrowing costs three times in the coming year, ..."
https://www.nytimes.com/live/2023/12/13/business/fed-meeting-interest-rates

- even though 2 weeks prior, the Feds stated "...it was “premature” to conclude that the Fed has finished raising its key benchmark rate or to “speculate” about cuts in that rate.", "Fed policymakers projected on Wednesday that they will lower borrowing costs to 4.6 percent by the end of 2024," and "Not a single Fed official expected interest rates to be higher at the end of next year."
https://apnews.com/article/inflation-economy-interest-rates-federal-reserve-powell-2200b5e3da872a349550ea707d4d6d42

- Even confirming at the end of Jan. that the Fed still plans to reduce rates
https://apnews.com/article/federal-reserve-inflation-prices-interest-rates-cuts-5880d78c4664484cf366bb1aeb2bb63d
and repeated 5 days later
https://apnews.com/article/federal-reserve-powell-inflation-prices-rates-cuts-e2d17c4ef6502e95d52f78759fa512b4

- Yet, in spite of that news, the market moved UP since the end of Jan, and is still moving up.

- And so now we have the Fed pivoting and speaking about potential rate INCREASES!?! Long AFTER the market has already been moving up. So if the Fed does increase rates, would they get the credit for the markets moving up???

So, I too can read... but I do not need to read these and many other headlines and official comments. I can simply read the summary of all of this, right off the charts, an therefore anticipate what the Fed is likely to do.

So, I submit an alternative for consideration, who is really leading whom, and who is reacting to whom?

May 10, 2024
1:14 pm
savemoresaveoften
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smayer97 said
What I present is an alternative view, and yes, it stands contrary to the common belief.

To me, its not a common belief. I am one side of the equation and I am not the central bank. So I know how it works. Dont need to decipher it from a chart, read some articles that some academics may have written.

May 10, 2024
2:30 pm
smayer97
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savemoresaveoften said
...I am one side of the equation and I am not the central bank. ...  

Interesting choice of words. Kinda telling about what you say you are; that you are one side of the equation.

I do not have to be any side of the equation to be able to see what is happening. It is like bid and ask. It does not matter what the ask is, it is the final closing price that determines what is, regardless of whatever each "side of the equation" says, or anyone else says or writes. That is what the charts capture; objective fact. No deciphering needed.

The articles are only examples that highlight what opinions were, and intentions, guidance, etc that were stated, and their timing vs what actually happened.

May 11, 2024
10:48 am
smayer97
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Sounds like Fauci, "They’re really criticizing science, because I represent science. That’s dangerous."

Please write your comments in the forum.