Above the Fold

Fed Takes a More Hawkish Stance, Steepens Tightening

In a mostly expected shift, the Federal Reserve (Fed) kept its key fed funds rate near zero, but will decrease its monthly bond purchases by a factor of two. Treasury security purchases will decline at a rate of $20 billion per month, while mortgage-backed-securities purchases will fall at a rate of $10 billion monthly. Expect a deeper deceleration in purchases as the New Year rolls around. 

The committee also clearly acknowledged that inflation has been running above its target rate of 2% for some time and now seems to expect price increases to continue for longer than was expected at its last meeting. The Fed is now prepared to hike rates up to three times in 2022, with expectations for two more in 2023 and another two in 2024. Regardless, the Fed remains in a state of quantitative easing as it continues to expand its balance sheet, which has increased by nearly $4 trillion since the start of the pandemic. 

Three Things 

1. PPI Inflation Headline Is Bad, the Internals Are Worse – The Producer Price Index (PPI), which represents a basket of goods at the wholesale level, rose a whopping 9.6% in November from the same year-ago period (the quickest pace on record). Core PPI was nearly 7%, also the largest gain on record. But another metric in the report, called “intermediate demand,” rose more than 26%. Intermediate goods are those processed by a domestic manufacturer for sale to other businesses, such as an appliance manufacturer selling to a retailer like Best Buy.  
2. SEC Looks to Quell the “Dash for Cash” – The Securities and Exchange Commission is set to propose new, controversial regulations that would deter investors from fleeing these types of investment vehicles during financial crises. During the Great Recession and even in 2020 as the pandemic swept the nation, investors inundated credit markets with redemption requests, causing massive market instability. One of the proposed solutions, however, would include a measure called “swing pricing,” which many firms warn could harm large swaths of the industry. Americans currently have roughly $5 trillion invested in money markets. 
3. Lithium Gets Lifted – Well, we can now add lithium to the list of commodities rising at record rates. The vital, relatively rare element has experienced a 240% increase year to date. As automakers are pushed to produce more electric vehicles (many in response to tightening regulations), demand for the metal is skyrocketing. And while there is plenty of lithium available, it’s a long, expensive process to convert it into the chemical used in making lithium-ion batteries. Supply is also constrained by environmental rules and tough permitting processes to get it out of the ground. 

Did You Know? 

Tea Party Anyone?

It was on this day nearly 250 years ago that colonists disguised as Mohawk Indians boarded three British tea ships and dumped 342 chests of tea into Boston Harbor. The midnight raid was a protest to the British Parliament’s Tea Act of 1773, which dramatically (and unfairly) lowered the tax rate for the failing East India Trading Company, giving it a virtual monopoly on the American tea trade. The “tea party” was organized by Samuel Adams after the British refused to return the tea to England. Roughly $18,000 of tea was tossed overboard.