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

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


The recent spike in bond yields finally has the attention of Federal Reserve policy makers. Gov. Lael Brainard said on Tuesday that “some of those moves last week and the speed of the moves caught my eye.” San Francisco Fed President Mary Daly said the central bank could alter the maturity of its bond purchases — or even, as it has done before, sell shorter-term securities to buy longer-term government bonds in a so-called “twist.”

Steven Blitz, chief U.S. economist and managing director for global macro at research service TS Lombard, says the Fed’s determination to keep interest rates low through quantitative easing is fueling another problem. Lending growth from commercial banks is slowing, at a time when the economy is accelerating.

Separating out mortgages — which banks don’t retain on their balance sheet — commercial bank lending is growing at about a 5% year-over-year clip, according to the most recent weekly data from the Federal Reserve. That is down from as high as 10% in April.

The Fed’s holding of Treasury debt to manage yields isn’t inflationary because it requires the central bank to hold commercial bank assets, Blitz says. Commercial banks don’t mind since the Fed pays them interest for what is essentially a riskless transaction. The Fed now holds 16% of commercial bank assets, up from 6% in 2019.

“This exercise is a reminder that the Fed cannot forever shield the markets from the cost of financing Treasury debt growing faster than nominal GDP. For now, the economy enjoys below equilibrium interest rates, but high reserves and capital constraints more broadly means banks are not fully able to help others leverage growth through lending that these low rates would suggest,” says Blitz.

Far from predicting an inflation surge, Blitz says the core personal consumption expenditures measure of prices will be growing just 1.3% in the fourth quarter, and 1.7% next year. Blitz says the likely $1,400 stimulus checks, and COVID-19 vaccinations, will boost the economy, but to a relatively tepid 4.5% annualized rate by the fourth quarter, slowing to 2.8% next year.

The buzz

Texas is ending its mask-wearing mandate and eliminating all restrictions on businesses. Rides provider Lyft
LYFT,
-0.49%

said it enjoyed its highest-traffic week since March 2020, as it narrowed its loss estimate.

Rocket Cos.
RKT,
+71.19%

will be in the spotlight, after the mortgage provider’s stock jumped 71% on Tuesday, in a move compared with the short squeeze that briefly lifted shares of videogames retailer GameStop
GME,
-1.84%
.

Server and storage provider Hewlett Packard Enterprise Co.
HPE,
-0.68%

reported stronger-than-forecast earnings and revenue for the January-ending first quarter.

The economics calendar includes ADP’s measure of private-sector payrolls, the ISM services report, and the Fed’s Beige Book of economic anecdotes.

The market

After ending lower on Tuesday, U.S. stock futures
ES00,
+0.55%

NQ00,
+0.65%

pointed to a stronger start, with the Dow industrials
YM00,
+0.64%

contract up over 200 points.

The yield on the 10-year Treasury
TMUBMUSD10Y,
1.442%

was 1.44%. Bitcoin
BTC.1,
+8.52%

futures topped the $50,000 mark, while gold
GC00,
-0.74%

futures fell.

The chart

Fund manager Columbia Threadneedle has concocted a return-to-normal index for the U.S. based on a variety of measures, such as travel, shopping at stores and eating out. It isn’t meant to track economic indicators like gross domestic product but instead is focused on measuring components of daily life. The most recent increase came on a return to in-person schooling.

Random reads

Singer-songwriter Dolly Parton converted her “Jolene” track to “Vaccine” as she received the first dose of the Moderna
MRNA,
-6.73%

COVID-19 inoculation she helped to fund.

Cuttlefish, unlike some toddlers, can pass what’s called the marshmallow test, which is designed to measure self-control.

Here’s some deep value for you — a small porcelain bowl bought for $35 at a Connecticut yard sale is going to be auctioned off. Broker Sotheby’s says it may fetch as much as $500,000.

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