Bonds and the Fed: Act 1

This week the curtain will ring up on the latest drama, in the long history of Wall Street. This week we will see the Bond Market and The Federal Reserve, as the Fed's Open Market committee Meets to ostensibly set short-term interest rates.

This week the curtain will ring up on the latest drama, in the long history of Wall Street. This week we will see the Bond Market and The Federal Reserve, as the Fed's Open Market committee Meets to ostensibly set short-term interest rates.

But there is much more to this meeting than a normal FOMC meeting. This will be the first meeting after the passage of the latest Stimulus Package.

A stimulus package aimed at offsetting the adverse effects of the Corona Virus Pandemic. A noble cause in itself, but it is one that has also dramatically raised our nation's debt. A debt that is financed primarily through US Treasury Bonds.

And as those of you who have followed those markets know, the last couple of weeks have seen a dramatic rise in bond interest rates, and the subsequent fall in bond principal.

Now our leading man for this drama is none other than Chairman of the Federal Reserve, Jerome Powell, who will take center stage on Wednesday at about 2:30 pm eastern time. This will be shortly after the announcement of the latest interest rate decision by the FOMC. And remember this is the short-term interest rate that they're deciding, and everyone but everyone expects that it will be held steady at 1/4%.

But Mr. Powell's role is much more, than just announcing short-term rates. He will be asked to somehow reassure the bond market that long-term rates should also hold steady. That this recent bond market reaction to all this added debt is unwarranted.

It is a very tall task.

And frankly, there are some who question Powell's ability to meet this challenge. It is, after all, a nearly herculean task. Simply put the US Government has added more debt over the past year, than at any time in our country's history. Imagine somewhere north of an additional $5 Trillion, if you add the past year and a half together.

Taking a look at the US Debt Clock (US Debt Clock -dot- org), makes your head spin the numbers are moving so fast. Right now we're just under 29 trillion dollars in debt, and that's before this latest 1.9 trillion is added to it.

Can anyone say above 30 trillion in a few weeks?

And Powell's task this week will be to convince enough investors that they should continue to consider the bonds which support this debt, as a place to put their money.

Not an easy task.But not impossible either. One of the most interesting aspects of all this has been how prudent, the American people, in particular, have been in allocating these stimulus checks.

Americans by and large, have not gone out and wasted their newfound money on consumer goods, and disposable goods.No, they have paid down their own debt, or sock the money away in their savings accounts. In a very real sense making this process a true transfer payment. A transfer of debt payment.

Transferring debt from the individual, if you will, to the Federal Government.

The same opportunity is being presented to the business sector and state and local governments in this latest package. Add them all together: small and large businesses, state and municipal governments, and you arrive at fully 1.1 trillion of the 1.9 trillion packages going to this group.

Now if they can only act as prudently as the American People have so far, then we may come out of this with a giant transfer of debt. But to do so Businesses and Governments need to pay down their debt loads, both at all-time record levels.

Yes, it means that the Federal government must now take on its own record debt. But it gives the rest of the economy, from individuals to businesses to local governments an opportunity to start afresh. A chance to get this economy up and running again at full speed, without the burden of over-hanging debt.And that the message that Chairman Powell needs to deliver on Wednesday.

Hopefully, he's listening.

Tags:
Start listening to The Screws Tighten For Evergrande.
19:29
Start listening to The Screws Tighten For Evergrande.
19:29