The Fed hiked its policy rate 25bp today:
Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.
The economic projections were also released. The dot-plot shows the policy rate above 5% for all of this year, above 4% in 2024,3%+ in 2025 (with projections showing a pronounced skew upwards) and longer run of about 2.5%.
US equities, after some volatility, decided not to like the decision and its accoutrements:
With minutes left until the official end of stock trading for the day, the S&P 500 has given up its earlier gains and is sliding toward a 1 percent loss. Despite acknowledging stress in the banking system, some investors have said the central bank was too dismissive of the extent of the pain still to come.
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Powell makes an interesting nod toward the role of social media and other new factors in the speed of the deposit flight from Silicon Valley Bank. He says the rapid run on the bank was different from what the Fed has seen in the past, and suggests it will need to update regulation and supervision to keep pace.
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Investors are hanging on every word Powell utters, swinging sharply higher and lower in response to his comments. Having risen as high as 0.9 percent, the S&P 500 is now 0.4 percent lower.
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Powell draws a clear distinction between the Fed’s normal bond buying programs, which buy assets to push down long term interest rates, and the lending it is doing to banks right now to calm jitters. This is a question people often ask: Doesn’t emergency lending pump money into the system? One big distinction, in my mind, is that those emergency loans are snuffed out pretty quickly (one year max, in this case).
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Powell, asked about Silicon Valley Bank, starts with the obvious: Its leaders, he says, “failed badly.”
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A lot of lawmakers and analysts have worried about the Fed’s rate increases further destabilizing the financial industry. Powell basically just brushed those concerns away after being asked about them.
The BoC released its Summary of Governing Council deliberations:
Members of Governing Council were comfortable with the MPR outlook that inflation will continue to ease this year as monetary policy tightening works its way through the economy and base-year effects pull down 12-month rates of inflation. However, they remain concerned about the risk that inflation could get stuck materially above the 2% target. They discussed what needs to occur for inflation to return sustainably to target. Short-term inflation expectations need to come down, as do measures of core inflation. As well, competitive pressures need to return to normal to make businesses cautious about passing on higher input costs to final goods prices. That will require a better balance between demand and supply, so businesses worry more about losing customers if they increase prices. Unit labour costs also need to moderate, with some combination of slower wage growth and faster productivity growth. This is particularly important to ease inflation in prices for most services, which is proving sticky in the face of rising unit labour costs.
Governing Council also noted that, at 3.9%, growth in government spending in the fourth quarter was stronger than expected. They observed that sustained growth in government spending that is considerably faster than potential growth would boost domestic demand. The Bank will incorporate announced fiscal plans by federal and provincial governments into its updated projection in the next MPR on April 12.
Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, gave a speech titled The return of inflation – here to stay?:
This also includes a solid resolution framework to deal with situations where shareholders and creditors of a troubled bank have to bear losses. On this matter, I would also like to reiterate what the ECB, the SRB and EBA have already pointed out earlier this week. In particular, common equity instruments are first in line to absorb any losses that occur.
Only after they have been fully used up would Additional Tier 1 (AT1) instruments be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions.1 Additional Tier 1 – a market worth roughly EUR 250bn – is an important component of the capital structure of European banks.
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In the short term, the policy focus is on bringing down cyclical inflation – largely deriving from the poly-crises of the past three years. However, there is another twist to the current challenge, which most of you will already be aware of and I will only briefly touch upon today.Namely, is the era of structurally low inflation pressure coming to an end? After two decades of subdued price pressure, the tide may well have turned. Looking further ahead, changes in underlying trends could intensify inflationary pressures.
Some people refer to these challenges as the “three Ds”.
First, deglobalisation, driven by geopolitical tensions and a desire to reduce economic dependencies. Related processes have also become known as friendshoring or nearshoring.
Second, the decarbonisation of the economy, incentivised in particular through carbon pricing, could exert persistent upward pressure – and not just on energy prices.
Third, demographics – more precisely, the assumption that dwindling labour supply will continue to exert upward pressure on wages.
All these factors could turn out to be inflationary over the coming years. That is another reason why the Eurosystem must remain vigilant in this regard and ensure that inflation expectations remain well anchored around 2%.
DBRS has released its views on the implications of the Credit Suisse AT1 writedown. I have updated the post NVCC & Credit Suisse accordingly.
PerpetualDiscounts now yield 6.32%, equivalent to 8.22% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.93% on 2023-3-17 and since then the closing price has changed from 15.32 to 15.34, an increase of 13bp in price, with a Duration of 12.41 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 1bp since 3/17 to 4.92%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed substantially to about 330bp from the 350bp reported March 15.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 6.1545 % | 2,403.6 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 6.1545 % | 4,610.0 |
| Floater | 9.38 % | 9.44 % | 63,820 | 10.03 | 2 | 6.1545 % | 2,656.8 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3548 % | 3,305.8 |
| SplitShare | 5.09 % | 7.61 % | 52,704 | 2.69 | 7 | 0.3548 % | 3,947.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3548 % | 3,080.2 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2723 % | 2,761.5 |
| Perpetual-Discount | 6.18 % | 6.32 % | 61,300 | 13.40 | 35 | 0.2723 % | 3,011.2 |
| FixedReset Disc | 5.72 % | 7.48 % | 98,765 | 12.14 | 61 | 0.1918 % | 2,148.8 |
| Insurance Straight | 6.11 % | 6.18 % | 74,727 | 13.69 | 20 | 0.5171 % | 2,937.2 |
| FloatingReset | 10.01 % | 10.31 % | 33,474 | 9.33 | 2 | -0.9097 % | 2,475.6 |
| FixedReset Prem | 6.61 % | 6.50 % | 239,951 | 12.74 | 2 | 0.5787 % | 2,339.0 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1918 % | 2,196.5 |
| FixedReset Ins Non | 5.62 % | 7.14 % | 82,618 | 12.42 | 13 | 0.3398 % | 2,350.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRP.PR.D | FixedReset Disc | -4.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 15.10 Evaluated at bid price : 15.10 Bid-YTW : 8.87 % |
| BMO.PR.F | FixedReset Disc | -4.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 22.44 Evaluated at bid price : 22.90 Bid-YTW : 7.05 % |
| CU.PR.F | Perpetual-Discount | -3.69 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 17.99 Evaluated at bid price : 17.99 Bid-YTW : 6.33 % |
| BNS.PR.I | FixedReset Disc | -3.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 19.70 Evaluated at bid price : 19.70 Bid-YTW : 6.96 % |
| GWO.PR.N | FixedReset Ins Non | -2.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 12.00 Evaluated at bid price : 12.00 Bid-YTW : 7.93 % |
| BN.PF.I | FixedReset Disc | -2.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 8.01 % |
| SLF.PR.J | FloatingReset | -1.64 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 14.95 Evaluated at bid price : 14.95 Bid-YTW : 9.86 % |
| BMO.PR.E | FixedReset Disc | -1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 20.19 Evaluated at bid price : 20.19 Bid-YTW : 7.07 % |
| PWF.PF.A | Perpetual-Discount | -1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 18.22 Evaluated at bid price : 18.22 Bid-YTW : 6.29 % |
| MFC.PR.M | FixedReset Ins Non | -1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 17.05 Evaluated at bid price : 17.05 Bid-YTW : 7.64 % |
| BN.PF.C | Perpetual-Discount | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 6.47 % |
| SLF.PR.C | Insurance Straight | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 18.86 Evaluated at bid price : 18.86 Bid-YTW : 5.93 % |
| POW.PR.G | Perpetual-Discount | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 22.28 Evaluated at bid price : 22.55 Bid-YTW : 6.33 % |
| GWO.PR.P | Insurance Straight | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 21.64 Evaluated at bid price : 21.89 Bid-YTW : 6.19 % |
| FTS.PR.J | Perpetual-Discount | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 5.99 % |
| SLF.PR.G | FixedReset Ins Non | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 12.75 Evaluated at bid price : 12.75 Bid-YTW : 7.86 % |
| IFC.PR.C | FixedReset Disc | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 17.75 Evaluated at bid price : 17.75 Bid-YTW : 7.26 % |
| IFC.PR.E | Insurance Straight | 1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 6.14 % |
| MIC.PR.A | Perpetual-Discount | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 20.10 Evaluated at bid price : 20.10 Bid-YTW : 6.76 % |
| MFC.PR.J | FixedReset Ins Non | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 21.66 Evaluated at bid price : 22.03 Bid-YTW : 6.38 % |
| PWF.PR.P | FixedReset Disc | 1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 12.93 Evaluated at bid price : 12.93 Bid-YTW : 7.96 % |
| GWO.PR.R | Insurance Straight | 1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 19.60 Evaluated at bid price : 19.60 Bid-YTW : 6.16 % |
| IFC.PR.A | FixedReset Ins Non | 1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 7.02 % |
| BIP.PR.A | FixedReset Disc | 1.87 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 16.85 Evaluated at bid price : 16.85 Bid-YTW : 9.11 % |
| BN.PF.F | FixedReset Disc | 1.91 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 16.56 Evaluated at bid price : 16.56 Bid-YTW : 8.58 % |
| BN.PF.G | FixedReset Disc | 2.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 15.35 Evaluated at bid price : 15.35 Bid-YTW : 8.83 % |
| CM.PR.Q | FixedReset Disc | 2.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 18.30 Evaluated at bid price : 18.30 Bid-YTW : 7.36 % |
| MFC.PR.K | FixedReset Ins Non | 2.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 19.15 Evaluated at bid price : 19.15 Bid-YTW : 6.83 % |
| TRP.PR.C | FixedReset Disc | 2.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 11.33 Evaluated at bid price : 11.33 Bid-YTW : 8.88 % |
| TD.PF.E | FixedReset Disc | 2.77 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 18.55 Evaluated at bid price : 18.55 Bid-YTW : 7.37 % |
| TD.PF.D | FixedReset Disc | 2.90 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 17.75 Evaluated at bid price : 17.75 Bid-YTW : 7.65 % |
| TD.PF.B | FixedReset Disc | 3.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 17.19 Evaluated at bid price : 17.19 Bid-YTW : 7.56 % |
| TRP.PR.E | FixedReset Disc | 9.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 15.30 Evaluated at bid price : 15.30 Bid-YTW : 8.57 % |
| BN.PR.K | Floater | 13.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 12.50 Evaluated at bid price : 12.50 Bid-YTW : 9.45 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.T | FixedReset Disc | 53,704 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 16.75 Evaluated at bid price : 16.75 Bid-YTW : 7.67 % |
| TD.PF.C | FixedReset Disc | 42,184 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 7.57 % |
| BN.PR.Z | FixedReset Disc | 31,700 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 19.86 Evaluated at bid price : 19.86 Bid-YTW : 7.59 % |
| RY.PR.H | FixedReset Disc | 25,140 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 17.30 Evaluated at bid price : 17.30 Bid-YTW : 7.46 % |
| FTS.PR.K | FixedReset Disc | 17,051 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 16.05 Evaluated at bid price : 16.05 Bid-YTW : 7.84 % |
| FTS.PR.J | Perpetual-Discount | 15,548 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-22 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 5.99 % |
| There were 7 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| PWF.PF.A | Perpetual-Discount | Quote: 18.22 – 19.60 Spot Rate : 1.3800 Average : 0.8321 YTW SCENARIO |
| BMO.PR.F | FixedReset Disc | Quote: 22.90 – 23.98 Spot Rate : 1.0800 Average : 0.6871 YTW SCENARIO |
| CU.PR.F | Perpetual-Discount | Quote: 17.99 – 18.96 Spot Rate : 0.9700 Average : 0.6748 YTW SCENARIO |
| GWO.PR.T | Insurance Straight | Quote: 20.74 – 22.40 Spot Rate : 1.6600 Average : 1.3717 YTW SCENARIO |
| TRP.PR.D | FixedReset Disc | Quote: 15.10 – 16.04 Spot Rate : 0.9400 Average : 0.6787 YTW SCENARIO |
| BNS.PR.I | FixedReset Disc | Quote: 19.70 – 20.70 Spot Rate : 1.0000 Average : 0.7576 YTW SCENARIO |
” Second, the decarbonisation of the economy, incentivised in particular through carbon pricing, could exert persistent upward pressure – and not just on energy prices. . 100% true ,and in canada , we will get a 14 cent/ litre increase in the carbon tax this april , that will ripple through the economy raising every price . but its those damn price gouging grocery store owners our gov will blame . oh canaduh
I think the increase will be 3 cents per litre this April–from 11 cents to 14 cents. It’s not a 14 cent increase.
oops , thanks for that , ROD , it is still 3 cents higher that will ripple through raising inflation . next up what additional taxes will the budget bring . the gov will take everything but the blame .
“it is still 3 cents higher that will ripple through raising inflation”
you also have to consider the portion rebated
stusclues says: ,” you also have to consider the portion rebated” in my case , the rebate is less than the carbon taxes i pay .
For me the credit is a lot more than what I pay in carbon tax.
in my case , the rebate is less than the carbon taxes i pay .
Sounds like you would find it advantageous to decrease your carbon intensity or raise your prices for the goods & services you provide with all that carbon; which is exactly what carbon taxes are supposed to do.
The only thing wrong with carbon taxes is (i) they’re not high enough to have a serious effect, and (ii) there are too many exceptions (agriculture left out? Give me a break!)
” Sounds like you would find it advantageous to decrease your carbon intensity ” easier said than done , if i decrease the heat i put into the floor of my car wash it becomes unsafe for my customers , and i need a constant supply of hot water more than any solar could provide (i tried) . “or raise your prices for the goods & services you provide with all that carbon;” there is a limit to what customers will pay and there are alternatives , from not washing as frequently to going some where else . but on the bright side (sarc) the higher expenses make my income lower so i pay less income tax .
there are alternatives , from not washing as frequently to going some where else
Great! That’s exactly what’s supposed to happen.
[…] PerpetualDiscounts now yield 6.25%, equivalent to 8.12% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.95% on 2023-3-24 and since then the closing price has changed from 15.18 to 14.98, a decrease of 132bp in price, with a Duration of 12.41 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 11bp since 3/24 to 5.06%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed substantially to about 305bp from the 330bp reported March 22. […]