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Email this8:22 am
January 13, 2022
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A sentiment I've seen on this forum quite a bit is essentially this: "Take advantage of those higher rates now, because the first chance they get, the Fed and the BoC will drop them out of fears of crashing markets." I also feel this way, and I'm experiencing my share of angst about when to pull the trigger on some longer term GICs...I have major mistrust of central banks, as I think as Jerome Powell's example illustrates, they become political pawns. BUT...what if we're mistaken here? What if the inflation issue is by far the most serious thing central banks have to deal with? What if inflation is so pervasive and rampant that rates must continue to rise for the foreseeable future? There are some very credible economists out there who believe this is the case. For example, here's an opinion piece in Financial Times, written by Sonal Desai, chief investment officer at Franklin Templeton Fixed Income. Very interesting reading. Would love to hear some thoughts. https://www.ft.com/content/6b164dc7-0329-4efc-b19d-efe000831792 Update: I was able to read this article when I was referred by Google News, but when I click on it directly, it's behind a paywall. Apologies. Will look for an alternate.
8:35 am
November 8, 2021
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IMHO, this time around, inflation will stick for quite a while (months), and therefore, rates will ultimately rise. The BoC didn't react fast enough, and let the monster grow. It is also a global problem, since the pandemic essentially shut down entire economies, the recovery will be slow and painful, with depleted workforce for businesses to come back. Interesting times ahead for sure.
8:37 am
October 27, 2013
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The best way I know to deal with it is to hedge your bets with feet in both camps. I've never seen predictions on interest rates and bond yield curves play out as almost anyone believes at any given moment except by random coincidence.
My current view is central bankers will end up creating recessions because they were late to the game and will have to increase rates faster than the economy will absorb. That will cause rate increases to stall no later than mid-2023, and turn around back down as much as 50-100bp thereafter to 'neutral territory' of about 3%.
I will almost certainly have a different view by the end of this year.
8:38 am
January 13, 2022
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Here's the text, as I can't figure out the paywall problem.
Overdue reality check for Fed and markets has barely begun
Investors’ expectations that interest rates will not rise much may be very misguided
Sonal Desai
US Federal Reserve building
The US Federal Reserve has started tightening, with policy rates already moving up and the central bank set to shrink its balance sheet © AFP via Getty Images
The writer is chief investment officer at Franklin Templeton Fixed Income
The US Federal Reserve and financial markets are experiencing a long overdue reality check on inflation and interest rates. But markets have barely begun to take into account how far the world has changed.
I believe they are still experiencing a severe case of cognitive dissonance. Inflation has surged to levels not seen since the infamous 1970s and remains stubbornly high. The Fed has started tightening, with policy rates already moving up and the central bank set to shrink its balance sheet after ending its market-boosting asset-buying programme.
But even after the evidence of inflation rises in recent weeks, most investors still expect interest rates will not rise very much and will not remain elevated for very long. I think this may be very misguided.
Markets anticipate that US economic growth will slow as we head into 2023 — and here I would agree. High inflation has taken a toll on purchasing power and will hurt household consumption, even though real income still exceeds pre-pandemic levels. Supply chain disruptions continue to hamper production, and the combination of somewhat tighter monetary policy with less generous fiscal stimulus will hold back activity.
Financial markets have been conditioned to believe that the Fed will react to this slowdown in growth in the same way it always has in the post-financial crisis period: by loosening monetary policy quickly and decisively. This is where I expect things will play out differently.
This time when growth slows, inflation will in all likelihood still be too high for the Fed to stop tightening. Month-on-month headline consumer price inflation has averaged 0.6 per cent since the start of last year. Even if that monthly pace halves, inflation will end 2022 close to 6 per cent year over year, and will be running at an average of 4.5 per cent in the first quarter of 2023.
If financial markets are nonetheless expecting the Fed to quickly ease policy again, it’s at least in part because their cognitive dissonance has been abetted by a significant degree of wishful thinking that seems to inform the central bank’s own outlook.
The Fed seems to be hoping that inflation will fall back to its 2 per cent target despite policy interest rates remaining negative after taking into account inflation. Bringing inflation down in such circumstances is a feat that the Fed has never managed before.
How likely is it that the Fed will pull that off now without a more decisive policy tightening? The Fed seems to be betting that inflation expectations will remain anchored until all exogenous shocks have been worked out of the system. But consumers’ long-term inflation expectations are already running at about 4 per cent and wages are rising at a 5.5 per cent pace (average hourly earnings of all employees).
Every month that goes by, inflation expectations become entrenched at a higher level as workers, consumers and businesses learn to anticipate and get ahead of persistent increases in their cost base. When activity slows, it could take some pressure off this very tight labour market. But with labour force participation persistently below pre-pandemic levels, the cooling impact on wage growth might be limited. We have a wage-price spiral developing that will probably make inflation more self-sustaining than the Fed assumes.
We operate in a very different environment than we did a decade ago. Inflation has asserted itself as a major social and political issue for the first time in more than 40 years. The year-on-year rate may abate in coming months because it is measured against the higher base of inflation as 2021 progressed. But the effect will be slow and we will always be one supply shock away from inflation bumping back up. During the past 12 years, the Fed could always afford to give priority to supporting economic growth and asset prices because inflation remained blissfully dormant. This is no longer the case.
I therefore expect that even as growth slows, the Fed will keep hiking rates during the first half of next year, in order to bring inflation back under control. And that once markets realise the Fed cannot afford to reverse course, long-term yields will also move higher still.
We still need to acknowledge fully that inflation has become self-sustaining and bringing it back under control will be harder and more painful than the central bank hopes and financial markets are pricing in. This time, the Fed’s tightening cycle will be longer, and policy rates and bond yields will have to go higher than markets currently expect. The corresponding risk to asset prices and economic growth is greater than many like to admit.
8:53 am
January 3, 2009
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I personally believe rates will continue to rise for the foreseeable future.
The major driving factor to this decision is that the governments in the USA and Canada both seem hell bent on making life as expensive as possible.
The only thing that I think will stop rates from rising is the incoming recession.
It's fine to read economists points of views to gather information and make up your own opinion, but never make the the mistake of thinking anyone is right ever more than 50% of the time when it comes to these things.
9:35 am
April 30, 2022
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We're all in crystal ball gazing territory, but with that being said...
My guess is that the rate will grow at .50 clips to 3% and then hold. A recession seems inevitable, but I don't think this is going to be a typical recession -- the labor market is ridiculously tight. There are over a million posted vacancies in Canada right now, and there are many other unadvertised openings as well. Instead of mass layoffs, I think many companies are just going to slow down/pause hiring and try and manage with what they have (not going to be fun for a lot of overworked employees who have to pick up the slack -- we'll see how that plays out).
So, my sense is that it's going to be a new kind of recession where we don't see a lot of job loss. Maybe we'll need to coin a new term for this.
9:42 am
December 12, 2021
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The Federal reserve first need to raise rate expeditiously to "Neutral Rate" roughly 2.5% that neither boosts nor restrains the economy - what economists refer to as the “neutral” rate.
Once the Fed reaches its neutral rate it will keep going to .... what Financial markets are pricing in a rate as high as 3.6 percent by mid-2023.
Defining a recession, one of which was two consecutive quarters of negative GDP growth therefore theoretically recession wont happen before the last quarter of 2023. Inflation spiraling out of control, easing interest rate talk way to early
Now i will quote @AltaRed "I will almost certainly have a different view by the end of this year."
10:05 am
January 12, 2019
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.
Lotsa Crystal Balling, going on here in this thread ... LOL ❗
If only our future selves could speak to us, eh. 
Time for some 'Dollar Cost Averaging' ❓
- Dean
" Live Long, Healthy ... And Prosper! "
10:18 am
September 7, 2018
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I was watching the postings to see who would predict the end of the Ukraine-Russia War. I think that war with all the sanctions being imposed by many countries is quite negative for economic growth/recovery and a recession scenario sooner than later. If that does happen, at that point, interest rates will likely stop their upward move and could stabilize to a more normal level. I read that Russia has had to drop their central bank rate obviously to keep their economy from collapsing.
I think Dean may be right in saying "Time for some Dollar-Cost averaging." The party cannot go on indefinitely.
10:52 am
November 18, 2017
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Dollar-cost averaging only works if you always have cash available to invest. Those of us without high incomes or holdings in cash can't do it. And it works much better with equities than GICs, whose rates are constant during their terms.
RetirEd
RetirEd
10:57 am
April 30, 2022
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canadian.100 said
I was watching the postings to see who would predict the end of the Ukraine-Russia War. I think that war with all the sanctions being imposed by many countries is quite negative for economic growth/recovery and a recession scenario sooner than later. If that does happen, at that point, interest rates will likely stop their upward move and could stabilize to a more normal level. I read that Russia has had to drop their central bank rate obviously to keep their economy from collapsing.I think Dean may be right in saying "Time for some Dollar-Cost averaging." The party cannot go on indefinitely.
The thing about inflation is that it's so abstract -- it's essentially about the expectation of inflation. If people believe prices will go up next year, they'll stock up on stuff now. Demand increases, supply decreases, prices increase. People's belief in inflation is validated, so they buy even more stuff now -- repeat.
Higher rates are having an impact on housing prices -- which is to say that instead of being Alice in Wonderland-like absurd, they are now just crazy. Perhaps in a few months they will be merely strange.
1:22 pm
September 11, 2013
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I always knew many equity investors try to guess the markets' direction, it's been an eye opener to see the same "market-timing" here from GIC buyers, i.e. I was under the impression hardcore GIC folks just did their ladder-thing and ignored interest rate predictions.
I suppose if right now you think things are volatile and you only feel comfortable with the shorter-term view you can always just buy 1-year or so term GICs, say one every month or so instead of committing everything today, for the next while until you think the view has become clearer - though of course if rates tank (which could happen any day with an unexpected global event) you'll be upset you didn't lock in longer, so maybe that's a no-go too.
1:33 pm
March 30, 2017
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Stagflation follow by recession is what’s going to happen.
1:46 pm
January 13, 2022
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savemoresaveoften said
Stagflation follow by recession is what’s going to happen.
It does seem the likeliest of the scenarios to me as well.
1:50 pm
October 17, 2018
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canadian.100 said
I was watching the postings to see who would predict the end of the Ukraine-Russia War. I think that war with all the sanctions being imposed by many countries is quite negative for economic growth/recovery and a recession scenario sooner than later. If that does happen, at that point, interest rates will likely stop their upward move and could stabilize to a more normal level. I read that Russia has had to drop their central bank rate obviously to keep their economy from collapsing.I think Dean may be right in saying "Time for some Dollar-Cost averaging." The party cannot go on indefinitely.
The local cable channel ran a story today about the World Economic Forum annual meeting taking place this weekend in their headquarters in Davos and it said that Zelensky delivered the keynote speech where he called for more sanctions against Russia so it's likely they will be working to implement this in a coordinated way globally.
These annual meetings are attended by heads of global business , finance and civil society, as well as politicians from around the world. They have some interesting agendas and the head of this organization has written a book called "The Great Reset", and others I believe. They're the group that coined the phrase " In 2030 you'll own nothing and you'll be happy" You might want to factor in their agendas when gazing into your crystal balls as they have stepped out into the light and are going full steam ahead now with their plans.
1:58 pm
April 30, 2022
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2:02 pm
November 8, 2018
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canadian.100 said
I read that Russia has had to drop their central bank rate obviously to keep their economy from collapsing.
Not exactly. They dropped their central bank rate because they achieved their objective. Russian CB feared inflation of 20%, so they upped rate to 20% overnight.
That squashed inflation fears, made rouble very attractive comparing to euro and dollar, made rouble strong. Now that 20% inflation is no longer a threat, they started to drop rates.
Russian CB is the only one that knows what to do and when. Everyone else still believes inflation is going to be transitory, it appears. So, they do a lot of talk, but little action.
4:46 pm
September 7, 2018
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Bill said
I always knew many equity investors try to guess the markets' direction, it's been an eye opener to see the same "market-timing" here from GIC buyers, i.e. I was under the impression hardcore GIC folks just did their ladder-thing and ignored interest rate predictions.
Yes, as both an equity and GIC investor, I was also surprised to read here that GIC buyers were trying to "time the market" in buying GICs. I thought hard core GIC buyers stuck religiously to their ladder strategy come Hxxx or High Water, but obviously these GIC buyers are not following their "tried and true" strategy figuring they will now "gamble" and try to buy "higher" i.e. at a higher interest rate if they can beat the unknown timing factor. Of course it may not work because it is impossible to get the exact timing right for the highest interest and the optimum term................and if you get it wrong, you are locked in (perhaps not at the highest rate) as GIC funds are frozen until maturity.
5:05 pm
January 13, 2022
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canadian.100 said
Yes, as both an equity and GIC investor, I was also surprised to read here that GIC buyers were trying to "time the market" in buying GICs. I thought hard core GIC buyers stuck religiously to their ladder strategy come Hxxx or High Water, but obviously these GIC buyers are not following their "tried and true" strategy figuring they will now "gamble" and try to buy "higher" i.e. at a higher interest rate if they can beat the unknown timing factor. Of course it may not work because it is impossible to get the exact timing right for the highest interest and the optimum term................and if you get it wrong, you are locked in (perhaps not at the highest rate) as GIC funds are frozen until maturity.
Desperate times call for desperate measures. Yes, to some extent I am trying to time the GIC market, as are many others here. Why? Because we are at a very unique point in time. We haven't experienced inflation like this in a very long time. We haven't faced such extreme rises in interest rates for a very long time. And there's some risk that it might be a short window of opportunity, although, as the opinion piece I posted above suggests, it might be much longer. Speaking for myself, I don't have a pension as I've been self-employed my entire life. I've saved diligently for my own retirement. I have zero faith in the equity market at this point in my life, as retirement looms. If I choose wisely when it comes to when to invest in long term GICs, I live comfortably for the rest of my life. Frankly, there are no bad choices...I could pull the trigger now and I'd be comfortable, but if I hold out for something like a six percent five year or longer GIC, I'd be that much more comfortable.
7:10 pm
September 7, 2018
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lifeonanisland said
Frankly, there are no bad choices...I could pull the trigger now and I'd be comfortable, but if I hold out for something like a six percent five year or longer GIC, I'd be that much more comfortable.
6% GICs sound good to me too - hope both you and I do get these.
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