Why the “Jumbo Fed Hike” Means More Market Volatility

Our co-founder, Dr. Richard Smith, talked about last week’s “jumbo Fed hike” and its effect on the economy overall. Enjoy the excerpt from the conversation above; transcript below.

JOSH RHODES

The Fed announced they’re going to take their third consecutive “jumbo hike.” This is the highest federal funds rate that we’ve had since 2008. I’m hoping you can explain the economics to me. When everything is getting more expensive, and these guys come in over the top and raise the borrowing rate, how does that help us?

DR. RICHARD SMITH

One of the simplest ways is that mortgage rates go up, and automotive loan rates go up. Housing and automotive is some really significant part of the economy, like a third or something like that. So housing is slowing down. Housing prices are coming down because the cost of carrying a mortgage is going up.

When you increase the cost of borrowing, there’s less liquidity in the economy. Because money is not free anymore. Money was literally free! And it’s not free anymore. So there’s a cost to taking that liquidity on.

And so you see it in housing right now, one of the biggest impacts of it. So when you can get 3.5% overnight lending rates, you’re not going to get a 3.5% mortgage rate, because those with capital can earn 3.5% overnight, as opposed to on a 15–30 year mortgage.

The trouble is, we’re living in nonlinear times. So normally, if you’re on a linear trajectory in a straight line, and you give it a little nudge, you can change the trajectory of the line a little bit, right? Make it a little more up or a little more down. But in nonlinearity, you don’t have that control.

Shout out to Ben Hunt at Epsilon Theory — he’s been on this — one of the aspects of inflation is that the Federal Reserve really isn’t in control. Their hikes are having an impact, they will have an impact, but it’s going to take a lot longer for them to have an impact than people realize. And he said the same thing when rates were going to zero and negative. They’re not going to solve the problem this way.

There’s too much nonlinearity in the system right now. And so that’s going on as inflation is taking off.

They just don’t have the control that they think they do. And you know, they’ve even admitted it now, they’re like, “We don’t know what’s going to happen. We’re, you know, we’re flying blind. We got to go by the data when it comes out. We’re not giving forward guidance anymore.”

At least they’re admitting it. But we really don’t know.

We really don’t know what’s going to happen. We don’t know what happens, you know, when you push over here, if it’s going to pop out somewhere else.

That’s the situation that we’re in. That’s why there’s more volatility, more uncertainty.

👉 Click here to watch the full conversation between Dr. Smith and Josh Rhodes