Fed Tightening Is Not A Near-Term Threat

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Calafia Beach Pundit
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Summary

  • There is one huge thing that is missing in all the buzz about inflation: the surging M2 money supply.
  • As real rates move higher, the demand for money becomes intense, liquidity becomes scarce, and marginal firms get squeezed.
  • Swap spreads are a highly liquid indicator of general liquidity conditions, the health of the economy, and the outlook for corporate profits.

FED federal reserve of USA sybol and sign.

Bet_Noire/iStock via Getty Images

It's no secret that an aggressive tightening of monetary policy can be a real threat to the health of the economy. But even if the Fed surprises us with a 50 bps hike in short-term rates

Real Yields Yield curve slope

Fed, BEA (PCE core), Bloomberg

5 year nominal real yields

Bloomberg

small business optimism index

National Federation Of Independent Business

US job opening job seekers

BLS

small business optimism higher prices

NFIB

small business optimism increasing compensation

NFIB

dollar industrial commodities

Commodity Research Bureau, ICE

2 year swap spreads

Bloomberg

5 year CDS spreds

Bloomberg

This article was written by

Calafia Beach Pundit profile picture
56.44K Followers
Scott Grannis was Chief Economist from 1989 to 2007 at Western Asset Management Company, a Pasadena-based manager of fixed-income funds for institutional investors around the globe. He was a member of Western's Investment Strategy Committee, was responsible for developing the firm's domestic and international outlook, and provided consultation and advice on investment and asset allocation strategies to CFOs, Treasurers, and pension fund managers. He specialized in analysis of Federal Reserve policy and interest rate forecasting, and spearheaded the firm's research into Treasury Inflation Protected Securities (TIPS). Prior to joining Western Asset, he was Senior Economist at the Claremont Economics Institute, an economic forecasting and consulting service headed by John Rutledge, from 1980 to 1986. From 1986 to 1989, he was Principal at Leland O'Brien Rubinstein Associates, a financial services firm that specialized in sophisticated hedging strategies for institutional investors. Visit his blog: Calafia Beach Pundit (http://scottgrannis.blogspot.com/)

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