Treasury tripled the maximum size of its long-dated bond buyback from $2 billion to $6 billion. It ultimately bought $5.19 billion, and the 10-year yield pushed toward 5% anyway. When the government keeps escalating purchases because the market refuses to clear at politically tolerable yields, the direction of travel is yield curve control.
Inflation is giving the Fed no room to help. August CPI rose 0.4% for the month and 3.4% from a year earlier. Core CPI rose 0.3% for the month and 2.4% annually. Producer prices rose 0.4% for the month and 5.4% annually, while oil above $100 keeps feeding energy costs through the rest of the economy. The Fed’s actual target is 2% PCE inflation, and even its July report acknowledged inflation remained elevated relative to that goal. Inflation has been above target for over 60 months running.
The Fed and Treasury are pinned between the debt and the currency. Raise rates enough to defend purchasing power and the government’s refinancing cost becomes uglier, and no one can afford a home. Suppress long rates with larger buybacks and eventually outright money creation, and the bond market demands a larger inflation premium. Something has to give. My bet is the currency, because it is the only thing Washington can manufacture without asking anyone’s permission. Reminder that when they print money, they steal from the purchasing power of every dollar already in the system. Inflation is theft. Our grandfathers went to war over far less.
Happy Friday.