[BostonCard]

I think it is weird to have immense personal skepticism of the Federal Reserve but also to claim that it is perfectly reasonable for a sophisticated financial institution to take the Fed's prediction about interest rates at face value.  Sure, one might have looked at the Fed's predictions about interest rates and inflation as a "base case", but come on, in no universe does a bank not scenario plan.  "What if interest rates rise?" seems like such an obvious thing to game-plan... so obvious that asserting that this was unforeseen wouldn't pass the red-faced test.  More likely (and, it turns out, accurately, based on the link I provided earlier) is that this particular scenario was foreseen and communicated to executives but not acted upon, because doing so would have been less profitable in the short term.

It's also inaccurate to assert that the Fed controls the interest rates for long-dated bonds, which are at issue here.  The Federal reserve only sets interest rates for the Federal Funds rate.  While that interest rate influences other rates, sometimes that correlation is paradoxical (increasing short term rates can slow the economy, and 10-year Treasuries largely reflect the medium-term outlook for the economy).

https://www.stlouisfed.org/on-the-econom...rest-rates

Although it is still debatable whether the Fed leads or follows the market, movements in the policy rate are associated with similar movements in short-term interest rates.2

In contrast, the interest rate on a 10-year Treasury bond does not appear to move as closely with the fed funds rate. While there appears to be some co-movement, the 10-year interest rate appears to follow its own declining path.3

https://www.columbiathreadneedleus.com/b...treasuries

The yield on the 10-year Treasury has many drivers. For example, when economic confidence is high, demand for safe-haven assets (like Treasuries) falls. This pushes prices lower and yields higher. Yields are also influenced by uncertainty related to future inflation, growth and geopolitical risk. The 10-year Treasury yield may impact other longer term rates in the economy such as fixed-rate mortgages and corporate borrowing costs.

There is one way in which the Fed does have a more direct impact on long-dated treasuries, and that's through Quantitative Easing (where it buys long-dated bonds to drive down yields). However, the Fed announced it was going to start tapering its bond-buying back in November 2021. To the extent that the Federal Reserve influenced long-term bond yields upwards, I don't think it is fair to claim that the Fed misled people about it. They told us exactly what they were going to do.

Lastly, in every speech I've heard Chair Powell give, including the one in his testimony to congress last week, he says that future deicsions about the direction and magnitude of interest rate changes will be guided by the data. Inflation in late 2021 and early 2022 came in higher than the Fed had expected, and the Fed adjusted accordingly, exactly as it said it would.

BC

[BostonCard]

I think it is weird to have immense personal skepticism of the Federal Reserve but also to claim that it is perfectly reasonable for a sophisticated financial institution to take the Fed's prediction about interest rates at face value.  Sure, one might have looked at the Fed's predictions about interest rates and inflation as a "base case", but come on, in no universe does a bank not scenario plan.  "What if interest rates rise?" seems like such an obvious thing to game-plan... so obvious that asserting that this was unforeseen wouldn't pass the red-faced test.  More likely (and, it turns out, accurately, based on the link I provided earlier) is that this particular scenario was foreseen and communicated to executives but not acted upon, because doing so would have been less profitable in the short term.

It's also inaccurate to assert that the Fed controls the interest rates for long-dated bonds, which are at issue here.  The Federal reserve only sets interest rates for the Federal Funds rate.  While that interest rate influences other rates, sometimes that correlation is paradoxical (increasing short term rates can slow the economy, and 10-year Treasuries largely reflect the medium-term outlook for the economy).

https://www.stlouisfed.org/on-the-econom...rest-rates

Although it is still debatable whether the Fed leads or follows the market, movements in the policy rate are associated with similar movements in short-term interest rates.2

In contrast, the interest rate on a 10-year Treasury bond does not appear to move as closely with the fed funds rate. While there appears to be some co-movement, the 10-year interest rate appears to follow its own declining path.3

https://www.columbiathreadneedleus.com/b...treasuries

The yield on the 10-year Treasury has many drivers. For example, when economic confidence is high, demand for safe-haven assets (like Treasuries) falls. This pushes prices lower and yields higher. Yields are also influenced by uncertainty related to future inflation, growth and geopolitical risk. The 10-year Treasury yield may impact other longer term rates in the economy such as fixed-rate mortgages and corporate borrowing costs.

There is one way in which the Fed does have a more direct impact on long-dated treasuries, and that's through Quantitative Easing (where it buys long-dated bonds to drive down yields). However, the Fed announced it was going to start tapering its bond-buying back in November 2021. To the extent that the Federal Reserve influenced long-term bond yields upwards, I don't think it is fair to claim that the Fed misled people about it. They told us exactly what they were going to do.

Lastly, in every speech I've heard Chair Powell give, including the one in his testimony to congress last week, he says that future deicsions about the direction and magnitude of interest rate changes will be guided by the data. Inflation in late 2021 and early 2022 came in higher than the Fed had expected, and the Fed adjusted accordingly, exactly as it said it would.

BC