Rates

The Federal Reserve made it clear today that rates aren’t going anywhere anytime soon and that the current “stabilization” aka quantitative easing measures now in place for the bond and cash markets are also not going away. They did acknowledge that conditions have improved (aka, stocks went back up).

Here’s Peter Boockvar:

Both the bond market and the stock market are picking up on the fact that the median forecast for the fed funds rate is zero as far as the eye can see (thru 2022). The Fed seems intent on repeating the experiment of the 7 yr time frame at zero under Bernanke and Yellen and what the BoJ and ECB have been conducting for many years. This in addition to not pulling back at all their QE intentions.

My bottom line is this, it was hard enough for the Fed to get the fed funds rate from zero to 2.5% and shrink their balance sheet from about $4.5T to $3.75T a few years ago. Now I’d argue that it will be almost impossible to get anywhere close to those levels in the many years to come even if they wanted to because of the even greater dependency the markets have on them.

One of the recurring topics I continue to return to here is imagining a world in which the terminal level of interest rates into a cycle high just never goes back to historical levels we thought were normal – and what does that mean for stock valuations, capital formation, portfolio management, cash management, asset prices, retirement, disruption from easily funded venture capitalism, the demand for private equity, etc?

There’s just so much we don’t know about a world of endlessly abundant capital because the whole history of the economy has been a story of scarcity. Last summer I posted When Everything That Counts Can’t Be Counted and a lot of the things I was thinking about are even more relevant post-virus. We just saw a cycle-high Fed Funds rate of 2.5%! What will be the next cycle high, 1%?