by John Aziz, Azizonomics:
Since talk of the taper started, interest rates have been gradually rising. When Bernanke talked about the possibility of tapering QE in mid 2014 so long as growth and unemployment remain on track, rates leapt to their highest level since 2011:
A simple supply-demand analysis of Treasuries says that if the Fed buys less, ceteris paribus the price will fall and rates will rise. The Fed is implying it will buy less, and lo and behold markets are selling off on expectations that future demand will be lower. The analysis of those who say that quantitative easing is raising interest rates seems increasingly dubious to me.
The alternative analysis is that rates are rising on sentiment that the economy is improving. I wouldn’t rule that out, but the trouble is that the economy is still deeply depressed. GDP is still far below its pre-crisis trend. Broad monetary aggregates are still massively deflated. Lots and lots of working-age people who were working before 2008 still haven’t returned to the labour force:
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