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Hi Warren,

Do you think there is any chance that the Fed ever puts us into a steeply inverted curve, say something like 10% short rates with 6% long rates? Hard to imagine that happening with the housing market weak, but what do you think?

Very high probability – I’d say 85% chance if, as I expect, crude stays here or goes higher. maybe a lot higher.

Hiking causes inflation to accelerate via the cost structure of business, so when they start hiking, inflation accelerates. Guaranteed!

Only a major supply response will break the inflation. Like pluggable hybrids in 5-10 years or cutting the national speed limit to 30mph, which is highly doubtful.


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9 Responses

  1. Wouldn’t that scenario wreak havoc on commercial bank profitabilty…and thus the economy. Doesn’t seem to jibe with a muddling through economy.

  2. which one? hiking rates? gives banks added income on compensating balances, and as long as borrowers can afford the payments- which they can during an inflation- they do very well?

  3. Those banks that borrow short and lend short might do fine, but I’d think there would be plenty of banks hurt that borrow short and lend long, especially if they are highly leveraged in that area.

  4. I would have to believe a steeply inverted yield curve would make it more diificult for banks, particularly ones that are largely funded with deposits, to generate positive net interest spreeads as they tend to borrow short and lend long.

  5. banks are prohibited from borrowing short and lending long. it’s called gap risk and the occ watches this very closely. they are required to be nearly neutral regarding interest rate risk

  6. What will happen to long rates as inflation continues to increase?
    How high do you think mortgage rates will go in the high inflation scenario?

  7. Long rates will rise, but not as fast as shorter rates, particularly after the Fed makes it clear it’s in hiking mode.

    Double digit

  8. Ok so we know that in this inflationary high mortgage rate world that’s just around the corner you’ve already said you expect housing prices to consequently rise. Wages would have to rise fairly dramatically to be able push housing prices up in the face of higher
    monthly costs for interest,gas,food, and record high real estate inventory. Seems plausible in regions that don’t have high inventory
    like utah or oregon but not in south florida where there is possibly five years on inventory. Seems to fly in the face of common sense for
    this to happen in the bubble markets any time soon.

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